Saudis Saudis Saudis

Saudis cut supply on weakening demand outlook

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Following a bumpy start to 2021 crude oil jumped higher after Saudi Arabia, increasingly viewed as the guardian of oil markets, unilaterally decided to cut production in February and March. While the price from a producer perspective received a welcome boost, the reasons behind the decision is probably driven by a growing concern about the near term outlook for demand. A renewed surge in corona virus cases, now also in Asia, has once again left the prevailing outlook challenged and with this in mind the cut not only looked well timed but also needed in order to prevent another setback


What is our trading focus?

OILUKMAR21 – Brent Crude Oil (March)
OILUSFEB21 – WTI Crude Oil (February)

____________________________________________________________________________________________________

Three days into the new year and the crude oil market has already seen its fair share of drama. After racing out of the gates on Monday to hit a fresh ten-month high on continued vaccine-optimism, it made a sudden about turn in response to what increasingly looks like a grim period ahead. Extended lockdowns and with that reduced mobility across the world is the current response to the fast mutating virus variant first seen in UK.

Into this uncertain outlook OPEC+ met in order to determine whether the market needed additional barrels on top of the 500,000 barrels/day agreed for January. A stubborn stance from Russia, who was looking for another increase, spooked the market and WTI and Brent both sold off before yesterday’s surprise outcome.

In the end, the group agreed on the most sensible outcome, i.e. to rollover current production levels to March. Topping up the agreement was the surprise unilateral production cut announced by Saudi Arabia, which increasingly is being seen as the guardian of the oil market. Setting worries aside the risk of yielding market share to others, especially US shale oil producers, the Saudis most likely concluded that the next few months could see weakness in Western world fuel demand spread to Asia where infections are rising quickly.

Following the initial price jump we believe the market will conclude that at best this decision would help stabilize the price of oil and not sending it higher at this stage. On that basis we maintain the view that while crude oil prices will eventually move higher, this is not the time, given the elevated level of uncertainty with regards to demand.

Crude oil has rallied hard since the early November vaccine news and while the weaker dollar and increased demand for reflation hedges have played its part, the ultimate driver for further price gains will be a pickup in global fuel demand. Something that we are unlikely to see until the vaccine rollout reach a level of penetration that can support renewed mobility and travel activity.

Following the US election win for Biden in November and the prospect for the democrats winning a paper thin senate majority, the focus on reflation hedges have supported a general appetite for commodities. At the end of 2020, speculators held a record 2.5 million lots long across 25 major commodity futures, representing a nominal value of $125 billion. While the two previous peaks in 2017 and 2018 were primarily led by the crude oil market, the chart below shows how bullish bets have been spread out more evenly between the three major sectors of energy, metals and agriculture.

While the biggest of these bets are held in crude oil with the combined 614k lots long in WTI and Brent representing a nominal value of $30 billion, it is worth keeping in mind that the net long remains well below the 1.1 million lots record from March 2018.

Buyers may attempt to drive Brent crude oil towards $55/b, the bottom of the 2019 consolidation range, but with the clouded demand outlook is unlikely to push it higher than that with support currently at $49/b followed by $46.60/b

Source: Saxo Group

Later today at 15:30 GMT, the US Energy Information Administration will release its “Weekly Petroleum Status Report”. The American Petroleum Institute reported late Tuesday that US crude oil stocks fell by 1.7 million barrels in the week to January 1. The data also showed a major gain in product stocks with gasoline and distillates rising a combined 12.6 million barrels. While the market impact given the period covered is likely to be limited, some focus will still be on implied demand for products in order to gauge the virus impact on consumers.

As per usual I will post the result on my Twitter handle @ole_s_hansen

Disclaimer

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 https://www.home.saxo/en-au/legal/.

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 (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

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

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

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.