Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
You can access both of our platforms from a single Saxo account.
Crude oil holding up well despite multiple headwinds
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil has extended its decline following yesterday's break below technical support. The latest weakness apart from the technical sell extension has been driven by continued worries about the pace of the recovery in global fuel demand and renewed dollar strength following last nights debacle of a debate between Trump and Biden.
What is our trading focus?
OILUKNOV20 – Brent Crude Oil (November)
OILUSNOV20 – WTI Crude Oil (November)
____________________________________________________________________________________________________
WTI Crude Oil (OILUSNOV20) and Brent Crude Oil (OILUKNOV20) have both extended their declines following yesterday’s break below technical support. The latest weakness apart from the technical sell extension has been driven by continued worries about the pace of the recovery in global fuel demand and renewed dollar strength following last nights debacle of a debate between Trump and Biden.
Adding to this, speculation that Libya’s oil industry, all but shut down since January because of civil war, may see rapid output growth over the coming months. So far production has returned to 250,000 barrels/day from sub-100,000 just a few weeks ago with JPMorgan and Goldman Sachs both seeing it reach 500,000 barrels/day by the end of year.
The demand side meanwhile remains troubled by the continued rise in Covid-19 cases leading to renewed lockdowns. With the timing of a widely available vaccine still uncertain, the captains of the three biggest independent oil trading houses don’t see a meaningful recovery in global oil demand for at least another 18 months.
Despite these latest developments, crude oil has done relatively well with the price still holding levels seen in June when the recovery story looked somewhat brighter. While resistance in Brent crude oil as per the chart looks solid around $43.50/b, the downside has so far also been capped by a number of recent lows around $39.50/b. For the final quarter we lift our Brent crude oil range by 3 dollars to a $38/b to 48/b range with the downside risks most dominant during the coming weeks.
During the recent weakness WTI crude oil has seen its discount to Brent narrow on speculation that U.S. oil production may shrink further over the coming months. The third quarter Energy Survey by the Dallas Fed, released last week found that 66% of oil and gas executive thought that U.S. oil production had already peaked. In addition the survey also found that a price of WTI above $51/b was needed in order to increase production. In addition many producers may struggle to source financing while the potential election of Joe Biden as president could pose a structural downside risk given his push towards green energy.
These developments all point to a price supportive lowering of U.S. production over the coming months as the price and with that drilling activity remain below the level needed to maintain production at current levels. The U.S. Energy Information Administration will later today publish its Monthly Crude Oil and Natural Gas Production report which will include production data for July, a figure more accurate than the weekly estimates that can be found in the ‘Weekly Petroleum Status Report’ also due today at 14:30 GMT.
Later today, the U.S. Energy information Administration will release its ‘Weekly Petroleum Status Report’. The American Petroleum Institute delivered mixed report last night with the biggest surprise relative to EIA surveys being a rise in gasoline stocks and a bigger than expected drop in distillates, primarily diesel.
As per usual I will publish the result of the report on my Twitter handle @Ole_S_Hansen
Latest Market Insights
Quarterly Outlook 2024 Q3
Sandcastle economics
-
-
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.
-
Equities: Are we blowing bubbles again
Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.
-
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.
-
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.
Disclaimer