Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Oil update: Short term headwinds vs. longer term opportunities
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil remains stuck in neutral and has during the past month, and in line with several other commodities, been struggling to find a gear. Triggered by a market torn between focusing on the prospect for stronger growth and increased vaccine-led mobility and the impact of continued virus flare-ups, and rising US shale oil production just as OPEC+ prepares to add supply.
What is our trading focus?
OILUKJUN21 – Brent Crude Oil (June)
OILUSMAY21 – WTI Crude Oil (May)
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Upcoming events:
Today at 12:00 GMT: OPEC’s Monthly Oil Market Report
Today at 20:30 GMT: Weekly storage report from the American Petroleum Institute
Wednesday: IEA’s Oil Market Report
Wednesday: EIA’s Weekly Petroleum Status Report
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Crude oil remains stuck in neutral and has during the past month, and in line with several other commodities, been struggling to find a gear. While the whole commodity sector has run into a period of consolidation and reduced investment interest due to the (temporary) loss of momentum, crude oil has been struggled to unite short term challenges with medium term opportunities.
The current rangebound behavior has been triggered by a market torn between focusing on the prospect for stronger growth and increased vaccine-led mobility driving higher demand and the impact of continued virus flare-ups, and rising US shale oil production just as OPEC+ prepares to add supply over the coming months. Adding to this the potential for rising production from quota exempt OPEC countries such as Libya and not least Iran as nuclear negotiations have resumed in Vienna. On top of these, concerns that China may tighten liquidity conditions and growth in order to combat rising inflation.
So far, however there are no signs of a let up in Chinese demand for key commodities after its trade surplus for March ended up much lower than expected. One of the main reasons being a continued strong appetite for key raw materials from crude oil, copper, iron ore and coal. During the month China imported record levels of copper concentrates, nearly 50 million tons or 11.7m b/d of crude oil, the highest monthly figure since last July, and more than 100 million tons of iron ore.
Before Easter OPEC+ announced plans to increased production further over the coming three months in order to meet an expected pickup in demand during the summer peak period. According to recent Oil Market Reports, both the IEA and OPEC expect the 2021 call on OPEC to reach 27.3 million barrels/day in 2021, some 2 million barrels/day above the 25.3 million barrels/day they produced in March.
One of the questions remain, how much of that increase will be provided by countries not restricted by quotas. During the past twelve months the OPEC 10 group with quotas have cut production by 4.7 million barrels/day while the three with no quotas, led first by Libya and now Iran, have lifted production by 1.1 million barrels/day.
The mentioned loss of momentum during the past month has triggered a 107k lots or 14.5% reduction in WTI and Brent combined net long to 630k lots or 630 million barrels, the smallest position held by money managers since January. Crude oil bulls however will take some comfort from the fact the reductions so far has primarily been driven by long liquidation while the appetite for short selling remains low.
Overall we see crude oil remains rangebound for a while longer with $60 and $65.5 being the outer boundaries in Brent crude oil. While the short-term outlook remains a bit challenging the prospect for rising demand towards the end of the quarter and into the second half, combined with OPEC+ flexibility should eventually help steer the price back towards the March high, but probably not much beyond.
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