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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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OPEC+ set to open taps on firm crude oil market expectations
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil reacted very calmly to the OPEC+ decision to proceed with plans to add more barrels from May and onwards while a surprise rise in oil stocks reported by the API was offset by equally large reductions in fuel stocks. Brent has been in a recovery mode since the March sell-off with the price stuck in a five dollar upward sloping range currently between $63.50 and $68.50.
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OILUKJUN21 – Brent Crude Oil (June)
OILUSJUN21 – WTI Crude Oil (June)
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Crude oil reacted very calmly to the OPEC+ decision to proceed with plans to add more barrels from May and onwards while a surprise 4.3-million-barrel increase in oil stocks reported by the API was offset by equally large reductions in fuel stocks.
Despite a virus resurgence in Asia, led by India, which may cut the short-term demand outlook for fuel, OPEC+ still expects world oil demand will rebound by 6 million barrels/day this year. Agreeing with this assumption we find Goldman Sachs who sees 80 dollar oil within six months based on expectations for the biggest demand increase ever seen for a six month period. With these expectations in mind OPEC+ agreed to proceed with its roadmap for increasing output by 2 million barrels/day over the next three months.
While demand is expected to rise strongly, the persistence of Covid-19 cases rising in a number of countries, most noticeable in India and Latin America, raise the risk of another false start as already seen on a couple of occasions in December and March.
Brent has been in a recovery mode since the March sell-off with the price stuck in a five dollar upward sloping range currently between $63.50 and $68.50. Inside this range, the 21-day moving average, currently at $64.90 has been providing some local support.
In our Q2 outlook we wrote: "While Brent is likely to end 2021 somewhere in the $70’s we remain skeptical about the timing as we watch a market that is increasingly in need of a time to cool off and to consolidate. Whether it will be given such a break depends on the speed with which OPEC+ adds barrels back into the market and a continued vaccine-led recovery in global mobility".
Until we see a meaningful suppression of the virus, we see Brent struggling to break above the January 2020 high at $71.75. With continued outbreaks seen across the world, jet fuel demand, which pre-covid accounted for close to 10% of global demand, is likely to see a prolonged road to recovery, while diesel (economic activity) and gasoline (rising mobility and avoidance of public transportation) look set to continue to rise strongly.
Before today’s FOMC meeting which may impact fuel prices given the link to the dollar, Energy Information Administration will publish its Weekly Petroleum Status Report at 14:30 GMT. Last night the American Petroleum Institute showed a bigger than expected jump in crude oil stocks being offset by equally bigger reductions in fuel stocks. The market will also be looking for further signs of increased mobility through the implied demand through products supplied. Especially gasoline which is getting tantalizing close to break above the psychological 9 million barrels/day mark. As per usual I will published the result and charts on my Twitter profile @ole_s_hansen.
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