Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Crude oil looks to OPEC+ and EIA for inspiration
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil remain stuck within an ascending channel and close to a five-month high . While other commodities have exhibited an elevated level of volatility this past month, crude oil has gone the other way as it struggles to respond to macro and oil related news. Focus today on the result of the OPEC+ meeting and EIA's weekly stock report where gasoline inventories may receive special attention.
What is our trading focus?
OILUKOCT20 – Brent Crude Oil (October)
OILUSSEP20 – WTI Crude Oil (September)
XOP:arcx – Oil & Gas Exploration & Production
XLE:arcx – Energy Select Sector SPDR Fund (Large-cap US energy stocks)
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Crude oil’s inability to respond to economic data and specific oil market news has seen both WTI and Brent crude oil continue to trade sideways within a narrowing range. The stability seen at a time where the OPEC+ group of producers have turned up their taps, has been taken as good news by some while others worry about crude oil’s inability to move higher in response to the recent dollar weakness and continued stock market strength.
The rangebound oil market has also seen the recovery in large-cap U.S. energy stocks stall with the SPY:arcx having outperformed the XLE:arcx by 15% since early June, when the impressive rally from the April low began to stall as WTI moved above $40/b.
Six days in a row WTI has now been rejected at $43 with the move above its 200-day moving average failing to trigger any technical buying interest. Support, as can be seen on the chart below, continues to move closer with the levels to look out for being trendline support at $41 followed by $40.35, the 50-day moving average.
Both crude oil contracts once again failed to receive a bid from the general risk appetite being signaled yesterday through a weaker dollar and a new high in the S&P 500. While not expected to be a market moving event, the market nevertheless awaits the outcome of today’s OPEC+ committee meeting. The Joint Ministerial Monitoring Committee (JMMC) will analyse and discuss the latest oil market developments. They a likely to refrain from making any major announcement at a time where pandemic related demand concerns continue to off-set improved economic data among key consumers.
They will also be keeping a close eye on U.S. shale oil producers and take comfort from the fact that a sharp fall-off in well completions could see production fall even further from its current 10.7 million barrels/day before eventually stabilizing.
Instead the group will continue to maintaining discipline while applying pressure on those countries that have yet to reach their agreed production targets. Not least considering news that Libya potentially could resume some crude oil exports after its eastern commander Khalifa Hafar said ports closed since January can reopen. Libya’s oil production has slumped from 1.2 million barrels/day last year to the current 90,000 barrels/day.
Increased pressure on Iraq and Nigeria to make further cuts with the prospect of additional barrels coming from Libya over the coming months
Also today at 14:30 GMT, the 'Weekly Petroleum Status Report' from the U.S. Energy Information Administration. With crude oil stocks expected to continue their seasonal reduction, the focus may instead turn to gasoline. It is the worst performing contract today after the American Petroleum Institute said gasoline stocks rose by an uncomfortable large and counter seasonal 5 million barrels last week.
As per usual I will post results and charts on my Twitter handle @Ole_S_Hansen
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