Head of Commodity Strategy
Key points
Crude oil continues to trade within a narrowing range, with the current price not far from the averaged seen since April 2 last year when OPEC+ announced the first of several production cuts
Prices have recently bounced from an early June price slump that was driven by aggressive hedge funds selling after the OPEC+ alliance announcing plans to gradually unwind last year’s extra voluntary output cuts, starting October
Hedge funds longs in WTI and Brent have only been this weak twice in the last twelve years, raising the risk of a rebound.
Crude oil continues to trade within a narrowing range, and since April 2 last year when OPEC+ announced the first of several production cuts, the price of Brent crude has been averaging around USD 82.70 per barrel, not far from current levels. It highlights how production restraint by OPEC+ has helped deliver a period of stable prices, most likely at lower levels than originally anticipated by the group, many of which need prices closer to and above USD 90 per barrel in order to balance their budgets.
During the past week, prices have bounced following an early June price slump that was driven by aggressive hedge funds selling amid fading geopolitical risks and the OPEC+ alliance announcing plans to gradually unwind last year’s extra voluntary output cuts, starting October, but contingent on prevailing market conditions. In recent months, lacklustre demand and strong non-OPEC+ supply have prevented the market from tightening to the point supply could be added back into the market.
This past week monthly oil market reports from OPEC and the International Energy Agency highlighted a widening gap in their respective outlooks for 2024 and 2025 demand growth. While OPEC stubbornly has held onto an expected increase around 2.2 million barrels per day this year, the IEA has continued to downgrade its forecast, currently below 1 million barrels per day amid continued slowdowns in key markets, most notably OECD where exceptional gasoil weakness reflects challenging industrial conditions. The agency expects the subdued outlook will be carried forward into 2025 with a modest increase of 1 mb/d reflecting lacklustre economic growth, an expanding EV fleet and vehicle efficiency gains.
OPEC meanwhile maintained forecasts for strengthening oil demand in the second half amid continued economic growth in China and other emerging economies, saying the OPEC+ alliance will need to pump 2.7 mb/d more in the third quarter, thereby leaving ample room for the announced roll back of production cuts. It is however very clear that the direction of crude oil prices in the coming months will very much depend on which forecast is the correct one. With half the year gone already it is quite extraordinary to see such a wide gap between two organisations that should have the same amount of data and information available.
Weeks of price weakness, as the geopolitical risk premium deflated and the Q2 demand outlook slowed more than expected following an exceptional strong first quarter, helped drive a hedge fund exodus out of long positions in WTI and not least Brent. It culminated in the week to June 4, following the OPEC+ production increase announcement, when the net long in Brent futures collapsed to a ten-year low at just 46k contracts (46 million barrels). Adding WTI, the combined net long slumped below 200k contracts, a level below which we have only seen twice in the last 12 years: in 2020 during the pandemic and last December just before Houthis began attacking ships in the Red Sea.
While history is no guarantee of what may happen next, we have on previous occasions when positioning was this low, seen a strong counter move. Whether a repeat is possible very much depends on whether the IEA or OPEC are correct regarding the short-term demand outlook. We do, however, expect a seasonal pick-up in demand, not only towards increased mobility during the summer holiday months, but also increased demand for cooling as heatwaves ravage across the Middle East, Asia and southern parts of Europe.
Recent commodity articles:
10 June 2024: COT: Brent long cut to ten-year low; metals left exposed to end of week slump
3 June 2024: COT: Crude length added before OPEC+ meeting; gold and copper see profit-taking
31 May 2024: Commodity weekly: Strong month despite late decline in crude and fuel
27 May 2024: COT: Gold and crude see increased demand as dollar longs plummet
24 May 2024: Commodity weekly: agriculture surges, metals fall on fading rate cut hopes
23 May 2024: Podcast: 2024 is heavy metals
22 May 2024: Crude oil struggles near two-month low
17 May 2024: Commodity weekly: Metals lead broad gains
16 May 2024: Gold and silver rally as soft US data fuels market optimism
15 May 2024: Copper soars to record high, platinum breaks out
14 May 2024: COT: Crude long slump; grain purchases surge
8 May 2024: Fund selling exacerbates softening crude outlook
8 May 2024: Grains see bumpy start to 2024 crop year
6 May 2024: COT: Commodities correction spurs muted selling response
3 May 2024: Commodity weekly: Grains boost, correction in softs and energy
2 May 2024: Copper's momentum-fueled rally halts amid weakening fundamentals
29 April 2024: COT: Gold bulls stand firm despite recent correction
26 April 2024: Commodity weekly: Sticky inflation and adverse weather focus
23 April 2024: What drives the gold and silver correction ?
22 April 2024: COT: Declining momentum may signal shift toward consolidation
19 April 2024: Commodity weekly focus on copper, gold, crude and diesel
17 April 2024: Copper rally extends to near two year high
16 April 2024: Crude oil's risk premium ebbs and flows
15 April 2024:COT: Hedge funds propel multiple commodities positions beyond one-year highs
12 April 2024: Gold and silver surge at odds with other market developments
10 April 2024: Record breaking gold highlights silver and platinum's potential
8 April 2024:COT: Speculative interest in metals and energy gain momentum
5 April 2024: Commodity market sees broad gains, enjoying best week in nine months
4 April 2024: What's next as gold reaches USD 2,300
3 April 2024: Q2 Outlook: Is the correction over?
3 April 2024: Cocoa: A 50% farmgate price boost a step in the right direction
2 Apr 2024:COT: Gold and crude longs maintained amid strong underlying support
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.
