Head of Commodity Strategy
Summary: Crude oil continues higher with WTI and Brent both reaching levels last seen in 2018, thereby going against a recent trend of profit taking hitting other major commodities in metals and agriculture. While the energy sector remain supported by an ongoing recovery in global fuel demand and tightening supply, controlled by OPEC+, other sectors have been hurt by a stronger dollar, improved crop weather and Chinese efforts to curb metal prices.
Crude oil continues higher with WTI and Brent both reaching levels last seen in 2018. This during a period where rallies across other commodities, especially in metals and key crops have run into corrections. While the energy sector remain supported by an ongoing recovery in global fuel demand and tightening supply, controlled by OPEC+, other sectors have been hurt by a stronger dollar, improved crop weather and Chinese efforts to curb metal prices.
These developments have during the past few weeks triggered a rotation by speculators out of metals and agriculture into energy. The combined net long in oil and fuel products (ex. natural gas) reached 977k lots in the week to June 15, the biggest bet on rising energy prices since October 2018, but still 33% below the January 2018 record. While industrial metals have suffered what looks like a short-term setback on rising market intervention by Chinese authorities and reduced focus on reflation, the energy sector has increasingly become the go to commodities.
This in the belief that OPEC+ in the near-term will 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 lack of CAPEX spent on new production could leave the market undersupplied from late 2022 and onwards.
The combined net long Brent and WTI crude oil reached 737k lots, again a level of exposure that was last exceeded in October 2018. A tightening spread to Brent and speculation that storage levels at Cushing, the WTI futures delivery hub, could shrink further amid strong Midwest refinery demand helped drive a 35% reduction in the gross short, thereby supporting a spike in the long/short ratio to a three-year high at 22.8 longs per one short position. While highlighting the risk a market at risk of becoming one-sided it also shows the strong belief in higher prices currently being exhibited by investors.
In our daily podcast, which you can find by searching for “Saxo Market Call” on any of your favorite podcast channels, we discussed the reasons why WTI crude oil has led the recent rally. Once again just like during the market panic last April, the focus has returned to Cushing, the massive storage hub where WTI futures contracts are exchanged for physical oil. On April 20 last year WTI crude oil temporarily hit minus 40 dollars per barrel as a Covid-related collapse in demand almost led to storage tanks topping out. Fast forward to today and we find US oil production still lingering some 2 million barrels per day below the pre-pandemic peak as the sector struggles to find a gear amid a change in the focus.
Strong Midwest refinery demand as fuel demand continues to recover and the mentioned slow recovery in US shale production has left Cushing stocks trailing their five-year average.
Later today at 14:30 GMT the EIA will publish its “Weekly Petroleum Status Report” and following last nights update from the American Petroleum institute, the market is looking for a fifth consecutive draw in crude stocks with 2.6 million being at Cushing. Result can be found on my Twitter @ole_s_hansen.
Increasingly, however, the oil market focus will turn to next week’s OPEC+ meeting, and through the actions or inactions of the group the market will be sent a clear signal whether its price stability through raising production or higher prices that the group will be seeking. Once again we may find Russia and Saudi Arabia on each side of the argument, but as per usual and as we grown accustomed to in recent months, the group will undoubtedly find a compromise that suits both sides.
WTI comment from our technical analyst Kim Cramer
In the short-term WTI crude oil continues to trade within a rising channel, and the uptrend will stay intact as long the price stays $69.75.
On a slightly longer-term chart we can see WTI is nearing strong resistance towards $77, the 2018 peak. If penetrated it may extend its 5 wave all the way to around $85. RSI seems to building up divergence but the jury is still out as to whether the uptrend has reached a level of exhaustion.
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