Oil hit by recession fears but downside is limited

Commodities 5 minutes to read

Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil’s roller-coaster ride continues to create a very challenging environment with the focus alternating between tight supply and the global economic slowdown's impact on future demand growth.


The difficulty in navigating a market with several and major opposing forces was laid bare last week when following a period of rangebound trading Brent crude oil suddenly collapsed. The slump towards key support at $60/barrel was triggered by President Trump’s decision to open another front in the already escalating trade war with China. However, his decision to use the tariff weapon against Mexico in order to force a reduction in the flow of migrants from Central America was rounded upon by business as potentially accelerating an already visible economic slowdown.

The recession themed sell-off has in our opinion potentially already  run its course after Brent crude found support ahead of key support at $60/b. A break below would signal a potential return to the December low which current fundamentals just simply don’t support. The short-term outlook nevertheless hinges on the performance of US stocks and whether speculative longs need to reduce bullish bets further. 
Source: Saxo Bank
A month that began with elevated speculative longs looking for the market to be supported by tight supply and Middle East tensions, turned on its head with WTI futures in New York posting its worst monthly performance in seven years. According to the latest Commitments of Traders report covering the week to May 28, speculators cut the combined net-long in WTI and Brent crude to a three-months low. 

For the first time during this recent reduction Brent crude was not immune with the tight supply focus switching to increased risk of lower growth and demand. The 41k lots Brent reduction to 353k was the biggest since last November while the 53% jump in the gross short to 50k lots was the biggest since October.
Opec, led by Saudi Arabia, is now likely to increase its resolve to maintain pricesupportive production cuts beyond the current six-month period. The cartel meets later this month and with Saudi Arabia and others picking up market share from Iran, a contentious meeting lies in store. Helping this process has been news that Russia  produced less than its target for the first time since the current deal to cut supply was struck. However, the daily production of 11.114 million barrels/day, which is 76,000 barrels/day below the cap, was in response to the Druzhba pipeline contamination which reduced exports to Europe during the month. 

The monthly Opec oil production survey from Bloomberg published today found that the overall production level held steady in May with reductions from Kuwait (-40 kbp) and not least sanctions-hit Iran (-230 kbp) being offset by increases from Saudi Arabia (+170 kbp), Libya (+60 kbp) and Iraq (+50 kbp). 
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.