Head of Commodity Strategy
Summary: Crude oil trades higher for a second session, supported by raised expectations that Beijing is considering a broad range of measures to rivive a sputtering economy. In addition, an in-line CPI print on Tuesday has raised expectations the FOMC may keep rates unchanged at today's meeting. OPEC and the IEA meanwhile maintains an upbeat estimate for global oil demand in 2023 but with half of the increase expected to occur during the next quarter, there will be some room for disappointment should demand fail to rise at that rate.
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Global Market Quick Take: Europe
Crude oil prices trade higher for a second day after the IEA joined OPEC in delivering an upbeat assessment of the short-term demand outlook. In their monthly ‘Oil Market Reports’ for June both OPEC and the IEA raised their outlook for 2023 global demand, the IEA by 0.2 million barrels a day to 2.4 million barrels a day bringing total consumption to a record 102.3 million barrels a day. Ahead of these upbeat reports, oil prices were already being supported by an improved across-market risk sentiment, and the prospect for fresh initiatives being taken by the Chinese government to support a sputtering economy.
The overall sentiment among oil market analysts has in recent month been heavily leaning to a tightening crude oil market during the second half, and following the latest production cut from Saudi Arabia, the market is slowly coming around to the idea it may happen. With supply being kept tight, the potential for a deficit is rising, not least given the prospect of stimulus supporting Chinas economy and recession worries elsewhere potentially having been priced in already. However, with almost half of OPEC’s expected 2.5 million barrels a day rise in 2023 demand being pencilled in for the next quarter, there will be some room for disappointment should demand fail to rise at that rate.
With that in mind, we continue to forecast a rangebound market in the coming months, until the direction of key economies, including China and the US becomes clearer. The bottom of that range increasingly looks like having been established below $72 in Brent where three consecutive selling attempts have been rejected, potentially highlighting a concern that lower prices may trigger another production response from OPEC.
Speculators, such as hedge funds and CTAs responded to the Saudi production cut and subsequent 3% rally in the week to May 6 by raising their WTI and Brent combined crude oil long by the most in nine weeks. The 30k contract increase to 301.5k, a six-week high, was primarily driven by fresh longs in Brent and short covering in WTI. Overall, the net long remains well below the pre-banking crisis peak at 491k contracts, and it highlights a market suffering from loss of momentum amid global growth worries.
Ahead of today’s FOMC meeting, the oil market will watch out for any surprises in EIA’s weekly crude and fuel stock report. Data from the American Petroleum Institute released last night points to an across the board rise in oil and fuel stocks between one and two million barrels. Apart from the headline numbers, the market will also pay some attention to production which recently reached an April 2020 high and crude oil exports following a near 50% in the previous week. In addition, refinery demand will also be watched after runs reached 95.8% of capacity and highest since August 2019.
OPEC’s focus on supply management will likely enforce the view of a soft floor under the market, currently around $72 in Brent as mentioned, while an upside break seems equally unlikely as long the focus remains on a weakening economic outlook. From a technical standpoint, $80 area in Brent will likely offer a great deal of resistance and funds positioned for additional weakness are unlikely to change their negative price view until we see the return of an 8-handle.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
