Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Head of Commodity Strategy
Summary: Crude oil trades steady ahead of today's virtual OPEC+ meeting where the group will meet to assess the global supply and demand situation, and given the latest developments we see no reason why the group should not go ahead and agree on a monthly increase of 400,000 barrels/day, this time for October.
Crude oil trades steady ahead of today’s virtual OPEC+ meeting where the group will meet to assess the global supply and demand situation. With Brent crude oil trading back above $70 following the mid-August slump, and with the negative demand impact from the delta virus starting to ease, we see no reason why the group should not go ahead and agree on a monthly increase of 400,000 barrels/day, this time for October.
Following the fraught July meeting when a plan to increase production by 2 million barrels per day by year-end was derailed by a row over baseline levels, today’s meeting is unlikely to spring any major surprises. Not least after the OPEC+ joint technical committee (JTC) on Tuesday said that it expects the global oil market to remain in deficit this year before returning to a sizeable 2.5 million barrels/day surplus in 2022, potentially an expectations that could see the group slam the brakes on further production increases after December.
Later today at 14:30 GMT, the Weekly Petroleum Status Report from the US Energy Information Administration is expected to show another weekly drop in US crude oil and gasoline stocks. The report will not include the impact of Hurricane Ida which is estimated to have temporarily closed down around 95%, or 1.7 million barrels/day, of offshore crude output and a 1 million barrels/day reduction in refinery demand due to shutdowns, power outages and flooding. With this in mind, the market reaction to the report is likely to be muted given the distortions that will occur during the coming weeks.
During the third quarter we have been looking for the price of Brent crude oil to pivot around $70, a level which most OPEC+ producers can accept as being not to cold, hurting revenues, and not to hot meaning it will not promote accelerated non-OPEC production growth. Confirmation of the OPEC+ production increase together with fading impact of the recent disruptions in Mexico and the US Gulf coast should ensure the price continues to trade rangebound over during the coming months, before potentially moving towards $80 and beyond in the unlikely event demand exceeds OPEC+ and other producers ability to provide the barrels needed to balance the market.
Speculators in the oil market are often either driven by the need to hedge macro-economic developments such as reflation, others respond to changing oil fundamentals while the majority in our opinion are mostly focused on signals given through the price action. The loss of momentum and lower prices since the July peak have led to a one-third reduction in the speculative net long in WTI and Brent crude to an 11-month low around 500 million barrels. Once the technical and / or fundamental outlook changes these funds will have plenty of firepower to push the market.