Oil rally pauses as focus switches to growth and US stock report

Commodities 5 minutes to read

Ole Hansen

Head of Commodity Strategy

Summary:  Neither renewed Middle East tensions nor possibly deeper OPEC+ output cuts has managed to bump crude oil from its tight range. The reasons? Growing worries about the impact of the trade war on global economic growth as well as a stubbornly strong dollar, says Saxo's Ole Hansen.


Opposing forces have so far this month managed to keep WTI crude oil stuck in a relatively tight four dollar range and Brent a slightly wider $4.5/b range. Middle East tensions and the OPEC+ group of producers maintaining and potentially extending current production cuts have failed to lift the price through the April highs. This is happening as concerns about slowing demand growth due to the negative impact on the global economy of the US–China trade war continues to spread. 

Adding to this is the dollar, which, according to the US Fed’s trade weighted broad dollar basket has reached its highest level since 2002. This development, together with growth concerns, may once again lift macroeconomic concerns about the impact on several emerging market economies that account for most of the growth in oil demand. 

Using Brent crude oil as a proxy for the global market situation we are currently seeing an interesting market development. While the crude oil spreads are sending a signal about tightening, markets speculators are hesitant about increasing exposure further. The spread between the prompt and the sixth month Brent futures contract has reached a five-year high while hedge funds stopped buying a couple of weeks back. 
WTI crude oil has turned slightly lower today to challenge the uptrend from last December, currently at $61.60/b followed by the 200-day moving average below which it has not settled since January 16.
Source: Saxo Bank
With regard to the recent escalation of tensions in the Middle East it is our belief that the risk of it leading to an armed conflict and a subsequent spike in crude oil prices can be ruled out. With President Trump often measuring his success on low gasoline prices and high stock market valuation a war with Iran does not make any political sense with an election to be fought in 2020, no matter how much it is being sought by some, both inside and outside of Washington. 

However, with the global economy showing further signs of cooling as the impact of the US–China trade war begins to be felt outside of Asia,  the risk is that slowing demand growth eventually will overtake the risk of lower supply. The Paris-based OECD has downgraded further its projection for global growth this year while Rosengren, the Bosten Fed President, warned that the trade war is increasing downside risks to the US economy. Note the consensus forecast for US Q2 GDP growth has been downgraded to 1.98% compared with 2.65% a month ago. 

The biggest threat that could trigger an oil price spike is not from the Middle East but the Mediterranean where an escalation of the current unrest in Libya carries the risk of hurting production which have grown rapidly in recent years. 
We see a risk of slightly higher prices during the coming months as global demand reaches its seasonal peak. The OPEC+ group is likely to maintain a softly softly approach to rising production in order to avoid renewed price weakness. On that basis the only thing they can do at this stage is to signal willingness to maintain current production cuts until customers demand more crude to replace lost barrels from Iran. Baring a geopolitical event such as Libya or Iran, the upside in our opinion should be limited to $70/b with support focusing on the above-mentioned level.

Later today at 14:30 GMT (CET+2) the US Energy Information Administration will release its Weekly Petroleum Status Report. With US total stocks of crude oil and products currently running above its long-term average, the market had been looking for a price supportive draw in both. However that was not being entertained by the American Petroleum Institute which last night reported an increase in both crude and gasoline stocks. 
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd 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 Combined 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.

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) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
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) Pty Ltd 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 & Combined Financial Services Guide & Product Disclosure Statement 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. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. 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.

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.