oil

Crude prices seek stability ahead of key support and US elections

Commodities 5 minutes to read
Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Key points

  • Crude oil futures trade close to unchanged on the month following an eventful period that saw brief moves below USD 70 and above USD 80.
  • For now, the geopolitical risk premium which has ebbed and flowed all year has almost evaporated 
  • Downside risks remain limited ahead of a US election that may trigger fresh US sanctions on Iran and Venezuela
  • Hedge funds have adopted a "sell-into-rallies" strategy, and, combined with weak positioning, a change in the technical or fundamental outlook could trigger an upside reaction

Crude oil futures trade close to unchanged on the month following an eventful period that saw a brief slump below USD 70 being followed by an equally brief attempt to break above USD 80. This during a month that started and ended with a focus on sluggish demand and the risk of increased OPEC+ production, and in between topped up with temporary geopolitical risks and China stimulus spikes.

The geopolitical risk premium which has ebbed and flowed all year almost evaporated following Israel’s weekend strike on Iran, largely due to the strikes avoiding critical energy infrastructure. A move which eased concerns of an extended tit-for-tat conflict helped send crude prices to their biggest one day slump since 2022 while lowering the risk of an already low probability of a supply disruption from the Middle East. However, the risk of another flare-up has not gone away after Iran said it would respond to Israel’s strike in an appropriate fashion, without being more specific.

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For the past two years crude oil has traded within a narrowing range, with the current boundaries in Brent – as per the chart – being USD 70 and USD 82. - Source: Saxo

Instead the market attention has returned toward expectations for deteriorating global oil balances in 2025, when supply is expected to exceed demand, not least driven by an expected production increase from OPEC+ at a time of additional production growth from countries including the U.S., Canada, Guyana, Brazil, as well as Norway. In addition, the move towards renewables continue to gather momentum, thereby slowing and eventually reversing annual demand growth estimates.

However, ahead of the US election and a result that potentially could see fresh sanctions limiting output from Iran and Venezuela, the downside risk in our opinion remains limited. Not least considering the risk of another geopolitical risk premium emerging, OPEC+ delaying once again its planned production increase into 2025 while stepping up their focus on reigning in production from overproducing members. If none of these supporting measures emerge we may see the USD 60’s becoming the new USD 70’s in 2025, thereby challenging high-cost producers, especially in the U.S.

Hedge funds have for now adopted a sell into rallies strategi in crude oil, and combined with an already weak position in the fuel products, especially distillates, amid global demand worries and excess refinery capacity, the directional risk from a positioning perspective seems increasingly skewed to the upside on any supportive change in the technical or fundamental outlook.

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