oil oil oil

Demand worries weighing on crude oil

Commodities 5 minutes to read
Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  WTI crude oil trades back below $80 a barrel for the first time in more than two months while Brent has been challenging the early October low at $83.44. With the prospect of the Hamas-Israel conflict spreading to the oil-rich part of the Middle East increasingly been put at near zero, the focus has instead been turning to a weakening demand outlook forcing speculators to exit long and enter fresh short positioins, in the process potentially raising the risk of prices once again overshooting to the downside.


Weekly COT update: Near record gold buying drives risk of a correction


Key points

  • Crude oil has surrendered all of the geopolitical risk premium as focus turns to slowing demand
  • Saudi and Russian production cuts beginning to have the opposite impact on prices than intended
  • Speculative selling raising the risk of prices once again overshooting to the downside

WTI crude oil trades back below $80 a barrel for the first time in more than two months while Brent has been challenging the $83.44 low from early October, just before Hamas attack on Israel drove a geopolitical risk spike. However, while the death toll in Gaza from Israeli air strikes continues to rise to unimaginable levels, the prospect of the conflict spreading to the oil-rich part of the Middle East has increasingly been put at near zero.

Instead, the market focus continues to turn to the short-term demand outlook which is showing signs of weakening. Spreads in WTI and Brent between the prompt delivery month and three months later have both collapsed below $1/b from above $6/b back in late September, highlighting a deteriorating demand outlook into Q1-24. In addition, the spread between Dubai and Brent has shrunk to a two-month low around $0.6 a barrel, a reflection of easing concerns about a Middle East supply disruption and easing demand for Middle East barrels. At the same time speculators who bought more than 325 million barrels in the futures market between early July and end September on the prospect of Saudi cuts lifting the price are increasingly being forced to reduce longs while increasing short position amid the weakening demand outlook.

7olh_oil1

Third quarter strength continues to deflate with production cuts from Russia and not least Saudi Arabia beginning to have the opposite than intended impact on prices. From late June to late September Brent crude oil rallied by around one-third in response to Saudi production cuts amid a quest for higher prices and OPEC estimates of a 3 million barrel a day supply deficit. 

Fast forward and despite the biggest threat to Middle East stability in years, and production cuts being extended to yearend, crude oil prices have reversed sharply lower, once again highlighting how producers can control supply but not demand which is now showing signs of weakening, as the economic outlook for Europe, and potentially also the US and China remain challenged. Rising energy prices during the past six months helped slow the drop in inflation while strengthening concerns central banks would be forced to adopt a high(er) for longer stance on rates. The latter helped drive a steep rise in bond yields which triggered stress signals from the wider economy as it pushed up mortgage rates, hurting borrowers while causing painful losses for many investment funds and banks that could, in turn, curb lending into the economy. It has also pushed up borrowing costs across the developed world in the process sucking money out of emerging markets.

From early July to late September managed money accounts, such as hedge funds and CTA’s jumped onto the tight-supply led rally, and during this time they increased their net long position in WTI and Brent crude oil futures by a total of 326,000 contracts or 326 million barrels to a two-year high at 560,000 contracts, on a combination of 184,000 contracts fresh longs and the gross short being cut by 142,000 contracts to a 12-year low at just 45,000 lots.

7olh_oil2

Do note that this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals, in this case the production cuts. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market. In this case they were left holding a major long position just as the demand outlook started to deteriorate, hence the risk of prices once again overshooting to the downside as funds adjust positions once again.

Having once again, just like early October broken the 50% retracement of the June to September rally at $84.63, Brent crude has extended its decline below $83.44 with indicators suggesting a move down to strong support around $82. An RSI below 40 supports the bearish picture.

7olh_oil3
Source: Saxo

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • 350x200 peter

    Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • 350x200 althea

    Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • 350x200 peter

    Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • 350x200 charu (1)

    FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • 350x200 ole

    Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.