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 grinds higher with focus on OPEC and trade talks
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil continues to grind higher in the belief that a growth stabilising phase one trade deal can be reached. However we view the upside increasingly limited at this stage. Not least considering the prospects for another contentious OPEC meeting on December 5 and the emergence of several resistance levels.
Crude oil continues to grind higher in the belief that a growth stabilising “phase one” trade deal can be reached. Just like U.S. stocks the market has moved higher since early October when the potential for a trade deal began to emerge. Nearly two months later the prospect for a deal is being kept alive by both Washington and Beijing. Most recently with yesterday’s comment that U.S. and China “reached consensus on properly resolving relevant issues”.
The S&P 500 reached a new record before giving back some of those gains with the market beginning to show signs of trade talk fatigue. We worry that the eventual announcement of a deal may not be the game changer the market has priced in during these past couple of months. Instead it could see the market return to focusing on economic data which continues to weaken, not least in the U.S.
On that basis we see limited scope for Brent crude oil to break much higher. At least not before the December 5 and 6 OPEC meetings in Vienna where the focus is centered on the prospect for additional production cuts or at a minimum firmer compliance with the already agreed ceiling.
Supporting crude oil right now is the current market condition that remains reasonably tight due to strong seasonal demand. This is reflected in the elevated backwardation in Brent crude oil where the spread between the Feb-2020 and Feb-2021 contracts trades $4.8/b. The price difference reflects the return i.e. 7.5% a buyer can expect to achieve at unchanged prices over the next 12 months.
From a technical perspective Brent crude oil is now testing an area of resistance. The 50% retracement of the Aramco attack peak to the subsequent low is at $63.96/b (today’s high). Further resistance to be found at the 200-day moving average which is $64.50/b followed by the psychological important $65/b level which coincides the upper channel.
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