Surging Surging Surging

Surging crude oil in need of consolidation

Ole Hansen

Head of Commodity Strategy

Summary:  The energy sector led by crude oil continues its month-long rally, thereby supporting the recent jump in government bond yields in anticipation of even tougher action by the US Federal Reserve to curb inflationary pressures. As a result, energy sector stocks and ETF’s have avoided the sell-off hurting other sectors, not least the tech-heavy Nasdaq index. However, in the short-term, an elevated RSI above 70 and continued trading near the upper Bollinger band points to a need for consolidation


The energy sector led by crude oil continues its month-long rally, thereby supporting the recent jump in government bond yields in anticipation of even tougher action by the US Federal Reserve to curb inflationary pressures. As a result, energy sector stocks and ETF’s have avoided the sell-off hurting other sectors and not least the tech-heavy Nasdaq Index. Developments highlighting the fact that while surging bond yields may hurt interest rate sensitive stocks, the so-called old economy stocks are alive and well with the supply of crude oil, some partly due to temporary disruptions, struggling to keep up with current strong demand. 

Besides the surging omicron having a much smaller negative impact on global consumption it’s the realization that several countries within the OPEC+ group are struggling to raise production to the agreed levels that has been driving the energy sector futures and stocks higher in recent weeks. 

For several months now we have seen overcompliance from the group as the 400,000 barrels per day of monthly increases wasn’t met, especially due to problems in Nigeria and Angola. However, recently several other countries, including Russia have struggled to increase production further. The International Energy Agency in their just published monthly Oil Market Report said that the OPEC+ coalition managed only 60% of its planned increase in December while S&P Global Platts estimated the accumulated daily shortfall in December had risen to 1.1 million barrels per day. 

As expected, the IEA also lowered previous forecast for supply surpluses during the first and the second quarter after saying that the global surplus is shrinking and oil demand is on track to hit pre-pandemic levels. The Covid pandemic is once again causing record infections, but this time round, the surge is having a much more muted impact on demand. In addition the IEA also mentioned the current gas crisis which has led to an increased amount of gas-to-fuel switching. 

Following a 5.5 million barrels a day increase in global oil demand in 2021 the IEA sees demand growing by 3.3 million barrels this year and with spare capacity being run down courtesy of the OPEC+ gradual production increases, the remaining spare capacity may end up being concentrated in a few Middle Eastern producers and the US. 

This week Brent and WTI crude oil both broke their recent cycle highs with current levels not seen since 2014. The breakout has increased focus on $90, a level Goldman Sachs says could be reached in the second half, and even $100 per barrel with some OPEC members believing that could be a possible target given the outlook for tight market conditions during the coming months and even years. 

Momentum remains strong and open interest in both futures contracts are showing a healthy rise while speculators, a bit late to the recent rally, boosted bullish oil bets in WTI and Brent bets by the most in 14 months in the week to January 11. The combined net long—the difference between bullish and bearish bets—in Brent and WTI jumped during that week by the most since November 2020 to reach 538,000 lots or 538 million barrels. This is still well below the most recent peak at 737,000 lots from last June.

In the short-term, an elevated RSI above 70 and continued trading near the upper Bollinger band points to a need for consolidation. If triggered, the initial support will be the recent highs, $86.75 in Brent and $85.50 in WTI. Given the strength of the recent rally, both contracts can correct around 10% without putting the prospect for further upside gains into doubt. 

Source: Saxo Group
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.