Brent Brent Brent

Brent crude breaks higher

Trade View 5 minutes to read
Medium Term / Buy
Ole Hansen

Head of Commodity Strategy

Summary:  We look to buy Brent crude on the break of the double top from May at $80.50/barrel. We will set our stop at $77.40/b and trade the December contract.


Instrument: LCOZ8 or OILUKDEC18
Price Target: Open
Market Price: 80.03

Background:
Brent crude oil has reached the highest level since November 2014 after breaking the double top from May at $80.50/barrel. The move comes after the Opec+ meeting in Algiers over the weekend failed to deliver the production increase that President Trump demanded in a recent tweet.

Trump's actions, i.e. the re-introduction of sanctions against Iran, remain the key reason why oil prices are moving higher at a time when the US-China trade war and emerging market weakness have raised some concerns about the demand outlook. 

Given the immediate negative impact on supply and the not-yet-measurable future impact on demand, however, the price has found the upside to be the direction of least resistance. Adding to the strength this morning are comments from two of the worlds biggest oil traders, Trafigura and Mercuria, at the annual Asia Pacific Petroleum Conference (APPEC) in Singapore. Both highlighted the risk of crude oil (Brent) reaching $90/b this year and $100/b in 2019. Mercuria saw the potential drop in supplies from Iran as high as 2 million barrels/day. A drop of this magnitude is somewhat higher than expectations; if realised, Opec and its friends would struggle to meet the shortfall, hence the call for higher prices. 

The combination of low inventories, falling spare capacity, US production beginning to look constrained, production challenges in Venezuela, and not least the re-introduction of Iranian sanctions have created a situation where fundamentals, price momentum, and geopolitical risks all point to higher prices. 

Our breakout  model, which is built on the Donchian Channel Framework, has given us a buy signal today on a close above $79.80/b, the previous highest close from May 23. Adding to this the break above $80.50/b today and a continued extension to $81.90/b and beyond look increasingly likely. 
Parameters:

Entry: On a close above $70.80/barrel (LCOX8)
Stop: $77.40/b followed by a trailing stop of $3.2/b, equivalent to 2 ATR (Average True Range).
Target: Open.
Time Horizon: Medium term

Charts below (daily and weekly)
Brent crude
Brent crude (daily, source: Saxo Bank)
Brent crude
Brent crude (weekly, source: Saxo Bank)
Management And Risk Description:
Continued dollar strength could weigh further on demand as it increases the strain on EM countries already feeling the impact of high oil prices in local currencies. Another risk is the US releasing oil from its strategic reserves to counter the shortfall. 

A compiled overview of Trade Views provided on Home.saxo can be found here (https://www.home.saxo/en-au/insights/news-and-research/trade-views/report).

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 you initial investment.

Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

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.