Head of Commodity Strategy
Summary: Crude oil remains stuck in a tight range with Brent and WTI having struggled all month to gain a foothold above $80 and $75, respectively. However, a succession of higher lows since December, when the Red Sea crisis began, point to limited selling appetite from traders worried that geopolitical tensions in the Middle East may escalate to threaten supply from key producers in the region. A focus that has seen speculators increasingly focus on Brent at the expense of WTI. Also, today's weekly EIA crude and fuel stock report is likely to be distorted after the recent cold 'bomb' disrupted production while increasing demand for heating oil and diesel.
Crude oil remains stuck in a tight range with Brent and WTI having struggled all month to gain a foothold above $80 and $75, respectively. However, a succession of higher lows since December, when the Red Sea crisis began, point to limited selling appetite from traders worried that geopolitical tensions in the Middle East may escalate to threaten supply from key producers in the region. While such an outcome stays very unlikely, the risk has nevertheless managed to support prices which otherwise may have traded lower amid ample supply and soft demand.
In WTI, a sustained break above $75.50 could see it target the 200-day SMA at $77.6 with $80 being the next major psychological level after that. The rising trendline is currently providing support at $71.
Large money managers such as hedge funds and CTA’s have, since early December when the Red Sea crisis started, increasingly been diverging their crude oil exposure away from WTI towards Brent. According to weekly Commitment of Traders reports provided by the major futures exchanges in the US and Europe, the combined net long in WTI and Brent slumped to a 12-year low in early December at 171k contracts or 171 million barrels, with the split between Brent and WTI being 57% and 43%.
However, the combination of the Red Sea crisis disrupting normal supply routes and rising US production have since then triggered a major divergence between the two. While the general rally in crude oil from the early December lows has seen the total net long jump by 85% to 317k contracts, the split between Brent and WTI has decisively moved in favor of Brent with 72% of the total net long being Brent. Investors appear to have concluded production growth will continue to pressure prices in the United States while the Middle East conflict will provide some support for prices in Europe and Asia.
Commodity articles:
23 Jan 2024: Silver and copper in focus after recent declines
19 Jan 2024: Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
16 Jan 2024: Data dependent precious metals continue their bumpy ride
12 Jan 2024: Commodity Weekly: Geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: Video - Investing in Uranium
1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
16 Nov 2023: Podcast: Silver comeback, watch OPEC as crude oil slides lower
16 Nov 2023: Crude oil weakness adds focus to upcoming OPEC meeting
15 Nov 2023: Soft CPI lifts gold and beaten down silver and platinum
12 Nov 2023: Copper supported by green transformation demand and peak rate speculation
10 Nov 2023: Commodity weekly: Crude oil risks overshooting the downside
Previous "Commitment of Traders" articles
22 Jan 2024: COT: Commodities short-selling on the rise amid China woes and Fed caution
15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
