Head of Commodity Strategy
Summary: Crude oil prices remain under pressure with the latest weakness being triggered by OPEC’s decision to delay the meeting originally planned for this weekend until November 30, potentially pointing to a discord within the group about production levels, quotas and compliance, and with that reduced expectations the group will be able to intervene and arrest the latest slide.
Weekly COT update: Crude selling slows; grains in demand
Crude oil prices remain under pressure with the latest weakness being triggered by OPEC’s decision to delay the meeting originally planned for this weekend until November 30, potentially pointing to a discord within the group about production levels, quotas and compliance, and with that reduced expectations the group will be able to intervene and arrest the latest slide from above $90 in Brent to a recent low below $80. Saudi Arabia, having led from the front and cut production by more than 1.5 million barrels a day in 2023 will most certainly want a higher degree of compliance and potential more in terms of cuts from other members who have increased production while enjoying the higher prices achieved due to Saudi restraint.
The biggest concern but also highly unlikely development from a price stability perspective is the risk of Saudi Arabia dialling back its unilateral production cuts, a development that given the current demand softness and rising non-OPEC production would bring back memories of what happened to oil prices during pandemic hit H1-2020, when Russia refused to join Saudi-led efforts to stem the price through production cuts. Saudi Arabia started a temporary and very ill-timed price war with Russia that saw its production jump 1.6 mb/d while Brent crude slumped below $20 a barrel. Fast forward and Saudi Arabia are once facing lower prices and little help from its 'friends' to curb production at a time where non-OPEC supply in the coming two years look set to outpace growth in global demand, thereby forcing restraint from OPEC in order to protect prices.
While the temperature ahead of the meeting has been raised significantly, none of the producers will risk a public discord potentially sending prices even lower, and with that in mind we expect an agreement will be reached, mostly focusing on compliance to quotas and accountability on reported baseline capacity. While Saudi Arabia is likely to extend its current unilateral production cuts until the end of Q2 next year, they are most likely not willing to make any additional cuts, so much will depend on the behaviour of members like Iran who have been flooding the market with oil from increased production and from storage, and Russia who have struggled to deliver their promised cut. The UAE is potential another point of contention given their plans to raise production next year at the expense of African producers, Angola and Nigeria, who have been forced to accept lower quotas after not reaching their levels for many months.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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