Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access all our platforms from a single account.
Brent pausing ahead of key $70/barrel
Ole Hansen
Head of Commodity Strategy
Summary: Oil bears have had a rough time of late as crude has powered higher on the back of supply cuts, growing confidence in the Chinese economy and a general uptick in risk sentiment. But now, oil must breach several technical hurdles before it can continue its ascent.
Saxo Bank published its Q2-2019 outlook today. Our commodity section opened with this observation: “Commodities have cast off the caution that defined the start of this year and powered to strong collective gains, led by energy and industrial metals. As we enter the second quarter the mood is still good, with crude oil riding atop a wave of price-supportive supply news, gold encouraged by a dovish Fed and copper pinning its hopes on a US-China trade détente.”
With a specific focus on crude oil we wrote: “Several Opec producers, and Saudi Arabia in particular, need oil back above $80/barrel to meet their fiscal obligations and they are unlikely to be satisfied with Brent at $70/b. On that basis, we expect supply to be kept tight over the coming months, thereby supporting a potential extension towards $75/b before it eventually runs out of steam amid renewed concerns about the negative impact to global growth.”
Events and news during the past couple of weeks since writing the above have, if anything, been strengthening the current sentiment in the market. All in all, creating a very lonely environment for those looking for lower prices, not least President Trump who through Tweets, with his base and rising gasoline prices in mind, has been asking Opec to provide more barrels. Also considering his desire to further tighten the screws on Iran when the current waivers are due for extension or extinction in a months’ time.
The combination of dramatic production cuts from Saudi Arabia, sanctions hitting Iran and Venezuela, signs of Chinese growth stabilising and a general strong risk appetite, continues to drive crude oil higher. Current developments show how Saudi Arabia has reasserted itself since the Khashoggi murder and doesn’t want to be blindsided by US Iran waivers once again. With an Aramco bond sale coming up and with Saudi Arabia in need of +80 dollar/barrel to balance its books it is more than likely that the kingdom is prepared to support a continued recovery in the price of oil towards levels where demand growth may start to suffer.
Charts highlighting the current sentiment.
US crude oil production growth has stalled following the breakneck pace seen in 2018. The combination of adverse winter weather and the 44% price slump during Q4-18 is likely to have played its part. However, while the number of deployed rigs have dropped to a one-year low the EIA still expects production will continue to rise by 1.4m barrels/day in 2019 before slowing to 0.7m barrels/day in 2020.
With a specific focus on crude oil we wrote: “Several Opec producers, and Saudi Arabia in particular, need oil back above $80/barrel to meet their fiscal obligations and they are unlikely to be satisfied with Brent at $70/b. On that basis, we expect supply to be kept tight over the coming months, thereby supporting a potential extension towards $75/b before it eventually runs out of steam amid renewed concerns about the negative impact to global growth.”
Events and news during the past couple of weeks since writing the above have, if anything, been strengthening the current sentiment in the market. All in all, creating a very lonely environment for those looking for lower prices, not least President Trump who through Tweets, with his base and rising gasoline prices in mind, has been asking Opec to provide more barrels. Also considering his desire to further tighten the screws on Iran when the current waivers are due for extension or extinction in a months’ time.
The combination of dramatic production cuts from Saudi Arabia, sanctions hitting Iran and Venezuela, signs of Chinese growth stabilising and a general strong risk appetite, continues to drive crude oil higher. Current developments show how Saudi Arabia has reasserted itself since the Khashoggi murder and doesn’t want to be blindsided by US Iran waivers once again. With an Aramco bond sale coming up and with Saudi Arabia in need of +80 dollar/barrel to balance its books it is more than likely that the kingdom is prepared to support a continued recovery in the price of oil towards levels where demand growth may start to suffer.
Charts highlighting the current sentiment.
US crude oil production growth has stalled following the breakneck pace seen in 2018. The combination of adverse winter weather and the 44% price slump during Q4-18 is likely to have played its part. However, while the number of deployed rigs have dropped to a one-year low the EIA still expects production will continue to rise by 1.4m barrels/day in 2019 before slowing to 0.7m barrels/day in 2020.
The latest Opec production survey carried out by Bloomberg found that the cartel continued to cut production during March. Since November, Opec has cut production by 2.8 million barrels/day to a four-year low of 30.4 million barrels/day. The bulk of the reduction has been due to a voluntary contribution from Saudi Arabia (1250k b/d) and involuntary reductions by sanctions-hit Iran (330k b/d) and Venezuela (340k b/d).
These dramatic cuts, together with Russia’s contribution, have continued to tighten the oil market during the past few months. The backwardation between the December 2019 and December 2020 futures contracts has risen to the highest since October. This on a combination of speculative buying at the front of the curve combined with renewed producer hedging (selling) further out the curve. A counter seasonal decline in US crude oil stocks has furthermore supported an outperformance against Brent crude oil, the global benchmark, with the prompt spread between the two falling back below $7/b.
The latest leg up in the price of crude oil has been supported by signs of China’s economy beginning to stabilise, a continued rally in global equities and the continuation of aggressive production cuts. However, with RSIs beginning to flash overbought, Brent crude oil has now reached a critical level just below $70/b where it may find some resistance. Apart from being a key psychological level it also represents the 200-day moving average ($69.70/b) and the low of the last year’s consolidation area between $70/b and $80/b.
Next up will be Wednesday’s Weekly Petroleum Status Report from the EIA. Surveys point towards a price-supportive drop in both crude oil and product stocks. The American Petroleum Institute will report its findings later today at 20:30 GMT (CET+2, ET-4).
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...