Rising investment and physical demand drive oil towards 2021 high Rising investment and physical demand drive oil towards 2021 high Rising investment and physical demand drive oil towards 2021 high

Rising investment and physical demand drive oil towards 2021 high

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Commodities of most colors continue higher on a combination of expectations for a post-pandemic growth sprint triggering supply bottlenecks, green transformation focus, weather worries and increased investment demand from speculators and investors enjoying the current momentum while seeking a hedge against the risk of accelerating inflation. One of main sectors benefitting from increased investment demand is energy, most noticeable crude oil.


What is our trading focus?

OILUKJUL21 – Brent Crude Oil (July)
OILUSJUN21 – WTI Crude Oil (June)
GASOLINEJUN21 - RBOB Gasoline (June)

____________________________________________________________________________________________________

Commodities of most colors continue higher on a combination of expectations for a post-pandemic growth sprint triggering supply bottlenecks, green transformation focus, weather worries and increased investment demand from speculators and investors enjoying the current momentum while seeking a hedge against the risk of accelerating inflation. As a result the broad Bloomberg Commodity Spot index trades up 19% year-to-date with the year-on-year increase exceeding 60%.

The year-on-year rate of change has reached levels not seen for at least a decade, and with rising input cost forcing more and more companies to pass on the cost to consumers, we are increasingly seeing the risk of the current inflation spike not being the transitory phenomenon being touted by major central banks. Once inflationary pressures take hold it becomes very difficult to reverse and the risk being a self-feeding loop that may end up driving commodity prices even higher over the coming months and quarters, hence the increased focus on a new super-cycle. 

Most of the commentators primarily focus on rising demand as the main reason behind the continued run up in commodity prices, but investment demand plays an equally important role. The current demand from investors can either go directly into specific commodities via the futures market or exchange-traded funds, or via products such as bank provided swaps or index funds that tracks one of many well known commodity indices.

Three of the best known are the Bloomberg Commodity index, which we often use given its broad exposure across the three sectors of energy, metals and agriculture, and the S&P GSCI as well as the DBIQ Optimum yield diversified commodity index.

The composition of the three is shown below and it helps to explain why energy and in particular crude oil benefit greatly from increased investment demand. For each dollar an investor puts into an index tracking ETF or swap note, somewhere between 30 and 60 cents is being invested into energy products from crude oil and fuel to natural gas. Drilling a bit deeper we find that between 15 and 30 cents of each dollar invested goes toward an exposure in Brent and WTI crude oil.

Brent and WTI crude oil trade higher for a third day with Brent getting tantalizing close to $70/b, a level it briefly breached two months ago before suffering a 15% correction. The market, already supported by investment demand has also increasingly been focusing on reopening’s in Europe and the U.S. offsetting concerns about weaker demand in parts of virus-hit Asia. Especially in India where analysts forecast a sizeable drop in fuel demand this month between 0.5 and 1 million barrels/day.

Yesterday the market received an additional boost after the American Petroleum Institute reported a steep drop in U.S. crude stocks as well as sizable drops in both gasoline and distillate (table below), thereby reinforcing bullish views on fuel demand in the world’s largest economy. As per usual I will publish the result of the report on my Twitter profile @ole_s_hansen once it has been published at 14:30 GMT.

Source: Bloomberg, EIA, API & Saxo Group

Comment from our technical analyst Kim Cramer Larsson:
Since late March Brent crude oil has traded in a narrow four dollar rising channel, currently between $66 and $70. RSI is bullish with no divergence which indicates a likely test higher towards the next level of interest at $71.30/40, the March top and trendline connecting the previous three peaks. A break above could see the contract target the 2019 high at $75.60

Source: Saxo Group

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.