Crude: Following a small post-FOMC correction, crude oil quickly resumed its move higher with WTI and Brent both reaching levels last seen in 2018. This is in the belief that OPEC+ will, in the near-term, manage production increases in a manner that ensures continued price support as global demand continues to recover, and later on due to increased concerns that a lack of CAPEX spent on new production could leave the market undersupplied from late 2022 onwards. Recently, the rally has been led by WTI which has seen its discount to Brent narrow on speculation that storage levels at Cushing, the WTI futures delivery hub, could shrink further amid strong Midwest refinery demand.
Price rotations, that in recent weeks have favored energy over metals and agriculture, have also triggered a rotation by speculators. While they reduced exposure to metals, both precious and industrial, along with agriculture, the combined net-long in oil and fuel products (ex. natural gas) has become the biggest bet on rising energy prices since October 2018, but at 977,000 futures lots it is still 33% below the January 2018 record. While highlighting the risk of market bets becoming one-sided, it also shows the strong belief in higher prices currently being exhibited by investors.
Increasingly, however, the oil market’s focus will turn to the July 1 OPEC+ meeting, and through the actions or inactions of the group the market will be sent a clear signal whether it is price stability by raising production or higher prices that the group will be seeking. With Russia’s current government budget based on oil in the low 40’s, they may be more inclined to support a production increase in order to ensure a higher market share while limiting the risk of rising non-OPEC production.
Saudi Arabia, however, holds the key, not least after the goodwill they collected by their actions back in January when they made a unilateral production cut to support prices during a period of renewed lockdowns. The world is waiting to see whether they will try to support even higher prices by arguing against a bigger production increase. Continued tightness will ensure a steeply backward-dated curve which will benefit OPEC+ producers selling at prices based on high spot prices. Meanwhile, debt financed producers, an example being US shale producers, are often forced to hedge some of their future production 12 to 18 months out and, given the shape of the forward curve, at significantly lower prices than current spot prices.