Head of Commodity Strategy
Summary: A near non-stop rally in crude oil since September is showing its first signs of running out of steam, and while we do not expect a reversal, the market may enter a period of consolidation. The reasons behind the correction, apart from speculators scaling back long positions, are several and while some are directly linked to the oil market, others of equal importance involve China, Russia's Putin and the German government.
A near non-stop rally in crude oil since mid-September is showing some signs of running out of steam, and while we do not expect a reversal, the market may enter a period of consolidation before picking up steam as we head into yearend. The reasons behind the correction, apart from speculators scaling back long positions, are several and while some are directly linked to the oil market, others of equal importance involve China, Russia’s Putin and the German government.
Up until this week, the global energy market has been on fire with strong rallies in oil, gas and coal all creating a feedback loop that took prices of most fuels to multi-year or even record highs. Tight supplies of gas and coal in Europe and Asia leading to punitive and growth debilitating high prices have in recent weeks been one of the main reasons for crude oil’s additional price gains. The prospect of rising demand for diesel, heating oil and propane at the expense of gas has been estimated to lift global crude oil demand by up to one million barrels per day.
The reasons behind the lower crude oil price seen during the past 24 hours can be boiled down to these major developments:
The strong fundamental outlook supporting elevated prices of fossil fuels into 2022 has in our opinion not changed, but recent developments highlight the kind of volatility these markets can throw after us when both supply and demand uncertainties are at play. WTI, being the market with the strongest spot market fundamentals, given the mentioned stock slump at Cushing, has already managed to find support ahead of $80.50, the 21-day moving average while Brent's short-term technical outlook looks a bit more challenging, especially if gas-to-oil switching demand slow on continued gas and coal price weakness, and if Iran nuclear talks after several failed attempts should finally spring a positive surprise.
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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.
