Head of Commodity Strategy
Summary: Crude oil prices remain anchored near a cycle low with Brent crude hovering close to $70 per barrel while WTI has slumped back below, currently trading around $68. Not at all comfortable levels for Saudi Arabia and the OPEC+ group of producers ahead of this weekends meeting in Vienna where the group despite internal issues will have to show a united front in order to avoid further losses. Instead of being supported by the early April OPEC production cut, the market continues to focus on the global growth and demand outlook, currently toubled by developments, not only in China, the world’s biggest importer, but also the US and other key consuming regions
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Global Market Quick Take: Europe
Crude oil prices remain anchored near a cycle low with Brent crude hovering near $70 per barrel while WTI has slumped back below, currently trading around $68. The main driver continues to be concerns about the global growth and demand outlook, not only in China, the world’s biggest importer, but also the US and other key consuming regions. This focus has led to selling in the crude oil market from macroeconomic-focused funds seeking a hedge against such a slowdown.
Inadvertently the market is once again on a collision course with some of the major producers, led by Saudi Arabia, who have yet to see any price supportive impact of the April 2 production cut. Ahead of the OPEC+ meeting this weekend, the temperature has been rising, with the Saudi Energy Minister having become very vocal in his attack on speculators and even the International Energy Agency, whom he has accused of incompetence.
OPEC+ wants to show unity but with Russia continuing to sell discounted crude to China and India, two of Saudi Arabia’s major customers, the weekend meeting may spring a surprise or two. Reporting from the meeting will also be different after OPEC, under pressure from the Saudis, denied access to journalist from three major media groups.
In our latest update we highlighted how the “buy-side” interest across five major crude oil and fuel futures contracts had fallen to the lowest level in more than ten years. And despite seeing a 12% increase to 384k contracts in the latest reporting week to May 23, driven by an increase in the Brent net long and short covering in gas oil, the total remains 43% lower compared with this time last year. Inadvertently a situation that is now likely to provide some added tailwind through the rebuilding of long positions once the technical and/or fundamental outlook becomes more price friendly
In the short term, however, the market will continue to focus on the negative impact of China economic weakness, recession risks elsewhere and uncertainties regarding the direction of US short term rates, and with that the level of the dollar. Failure to deliver some price supportive action at the OPEC+ meeting this weekend could see oil prices drop further, but overall, we see the downside risk as limited with last month’s production cuts yet to be fully felt and priced in.
The overall sentiment among analysts is heavily leaning to a tightening crude oil market during H2 with OPEC’s own data indicating that global oil demand will exceed supplies by an average of roughly 1.5 million barrels a day in the second half of the year. In China meanwhile the market has been focusing on weak economic data while largely been ignoring near record refinery runs and strong imports. A sustained high run rate in the coming months may eventually help change that negative sentiment.
Brent crude oil, for now, remains stuck in the $70’s, and in order to change that while sending a signal a low in the market the psychological $80 level needs to be challenged and broken first. Until then the market is likely to remain rangebound with a short-term risk, as mentioned, of a break lower should OPEC not send a signal of strong support.
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