Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Commodity Strategy
Summary: Crude oil prices trades rangebound and considering the recent news flow which on balance has been mostly price negative, it may indicate the month-long sell-off has run its course with consolidation the focus ahead of a bounce later. The bounce seen today has occured despite continued dollar and yield strength following comments from the Saudi Energy Minister that speculators should "watch out". A comment which highlights the current frustration about the market and the influence of short sellers which have made a strong comeback during the past month.
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Crude oil prices trades rangebound and considering the recent news flow which on balance has been mostly price negative, it may indicate the month-long sell-off has run its course with consolidation the focus ahead of a bounce later. Speculators have recently increased their gross short position in WTI and Brent to near the level that was seen prior to the April 2 OPEC+ production cut, and with the Saudi Energy Minister once again telling speculators to “watch out” some (short sellers) may have second thoughts.
The mentioned negative loaded news flow has primarily been the recent dollar strength, as the hike or no hike debate attracts increased attention. In addition, the US debt debacle, recession risks and a weaker than expected China recovery story have also been playing their part, but with traders already holding the weakest exposure for more than ten years in the five major crude oil and product futures, one may argue that these potential headwinds are now close to being fully priced in.
The strength seen so far today is likely to have been supported by comments from Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman speaking at the Qatar Economic Forum in Doha. Once again, he reiterated that OPEC+ through its actions seeks stability more than targeting a certain price level or range. He also talked about his dislike for speculators trying to influence the price of oil, saying that speculators got hurt by the April 2 production cut and that they should “watch out”.
His comments highlighting growing unease the weakness seen during the past month. Some of which has been driven by fresh short selling with the latest Commitment of Traders data showing short sellers have made a comeback. In the week to May 16 the combined gross short in WTI and Brent, held by money managers and Other Reportables reached a near two-year high at 233 million barrels, a 111 million barrel increase in the last five weeks and 40 million barrels higher than the gross short that was registered ahead of the April 2 production cut.
Brent crude oil trades within a narrowing range, currently between $74.50 and $77.50, and based on current positioning the upside potential is on the rise. However, in order to 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. In WTI, a similar behaviour has emerged with the current range being $70 to $73.90.
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