Commodity Weekly: Crude oil consolidates on fresh virus concerns Commodity Weekly: Crude oil consolidates on fresh virus concerns Commodity Weekly: Crude oil consolidates on fresh virus concerns

Commodity Weekly: Crude oil consolidates on fresh virus concerns

Ole Hansen

Head of Commodity Strategy

Summary:  A sense of déjà vu emerged across markets this past week with some behaving like they did back in Q1 when the Covid-19 pandemic sent stocks and bond yields sharply lower. Fed's Powell warning about prolonged economic weakness and not least the risk of a second wave building in the U.S. and some other countries, has all but confirmed that the much touted V-shaped recovery is going to be very difficult to achieve. Gold rose while crude oil saw its first weekly drop since April.

A sense of déjà vu emerged across markets this past week with some behaving like they did back in Q1 when the Covid-19 pandemic sent asset prices sharply lower. Since April, the economic impact of months of lockdowns had been painted over by a massive rally in global stock markets. The support, however, from the Fed (wall of liquidity), TINA (there is no alternative) and FOMA (fear of missing out) showed its first cracks this week.

Despite a very dovish message from the U.S. Federal Reserve, markets have returned to risk-off mode with the dollar reclaiming some lost ground and the S&P 500 index on Thursday experiencing its biggest drop since March 6. Treasury yields were heading toward all-time lows thereby supporting gold while crude oil’s somewhat speculatively fueled rally came to halt after the price had run ahead of current fundamentals.

The combination of the U.S. Federal Reserve seeing a long road to recovery and the World Bank confirming the deepest global recession since WW2, and not least the risk of a second wave building in the U.S. and some other countries, has all but confirmed that the much touted V-shaped recovery is going to be very difficult to achieve.

Crude Oil: The outlook for demand for key commodities, not least energy, remains challenged by the not yet under control Covid-19 pandemic. While the situation in Europe, with the exception of the U.K., and China among others has improved, globally it is still worsening with a record number new cases being reported – mostly in the Americas and South Asia. There are more and more indications that a possible second ware of the pandemic could be taking hold in some U.S. states and that was the key driver behind the latest market developments. Not least considering that most countries experiencing a second wave, including the U.S., are unlikely to adopt renewed lockdowns measures for fears of the economic impact.

These developments helped send crude oil sharply lower to record its first weekly drop since April. The risk of a second wave slowing the recovery in global demand will pose multiple challenges. Not least to the OPEC+ group of producers who just recently managed to agree a one-month production cut extension. These cuts now translate into spare capacity which can be brought back when demand has recovered and the global overhang of stocks have been lowered. The group can for a period control supply, but not demand, and a weak recovery in demand may challenge the group’s resolve with the risk of quota cheating emerging.

The impact of Saudi Arabia’s ill-timed price war back in March continues to be felt in the U.S. where millions of extra barrels of imported oil from the Kingdom has helped send commercial stocks to a record high. While these flows will slow over the coming weeks, the positive impact on prices may not materialize for some time due to the combination of elevated gasoline and not least distillate stocks and the slow process with which demand continues to recover. Adding to this the risk that some shale oil producers may start to increase production as long forward prices remain around current levels.

Source: Saxo Group

Both WTI and Brent crude oil did not manage to close the gaps that were left open when the markets collapsed in early March after Saudi Arabia embarked on its short-lived price war. Instead, the market behavior following the agreement by OPEC+ members to extend the 9.7 million barrels/day production cut until end July, ended up signaling the beginning of an overdue correction/consolidation.

Hedge funds have been strong buyers of WTI crude since early March with the net-long reaching 380 million barrels in the week to June 2, the largest bullish bet on WTI crude oil since August 2018. While our longer-term bullish outlook hasn’t changed the next few months may look a bit more challenging with renewed Covid-19 outbreaks in the U.S. being the trigger that reduces the speculative position.

Precious metals: Gold’s inability, following the dovish FOMC meeting, to find a way through resistance above $1750/oz helped trigger some profit taking before renewed stock market and Covid-19 worries helped provide fresh support. While not offering any new initiatives, such as yield-curve control, the FOMC did provide a supportive outlook for gold. Official rates expected to be kept at zero through 2022 while robust monetary support will be provided through the continued buying of bonds.

We maintain our bullish outlook for silver and not least gold now that its premium to silver has narrowed. The main reasons why we expect to see a minimum move to $1800/oz in 2020 and a fresh record high over the coming years are:

  • Gold acts as a hedge against Central Bank monetization of the financial markets
  • Unprecedented government stimulus and political need for higher inflation to support debt levels
  • The inevitable introduction of yield controls in the US forcing real yields lower
  • A rising global savings glut at a time of negative real interest rates and unsustainably high stock market valuation
  • Raised geo-political tensions on Covid-19 blame game ahead of U.S. November elections
  • A weaker U.S. dollar
Source: Saxo Bank

Base metals: HG Copper was only surpassed by gold this week as it raced higher to reach $2.71/lb, the highest level since January before drifting lower as virus focus returned. The recent break above $2.50/lb, a key level of support-turned-resistance, finally saw hedge funds join Chinese speculators and turn bullish on the metal. Apart from the fresh accumulation of speculative longs, the rally from the March nadir has been driven by improved industrial demand in China, virus-related supply disruptions in South America and more recently a steady decline in stocks held at exchange-monitored warehouses, both in London and not least in China

Source: Saxo Group

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, 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. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such 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.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (
- Analysis Disclaimer (
- Notification on Non-Independent Investment Research (

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.