Head of Commodity Strategy
Summary: Crude oil jumped on Tuesday after the U.S. Energy Information Administration in its monthly Short-term Energy Outlook maintained their forecast of an oversupplied market by early next year leading to gradually lower prices. The CEO of the world's largest independent oil trader meanwhile said he was looking into a 2022 where tight supply could support a run up to 100 dollar per barrel. In the short term, however, the direction is likely to be dictated by developments in the gas market, not least in Europe which is seeing a sharp decline, and with that reduced demand for gas substitutes such as diesel and heating oil
Crude oil jumped on Tuesday after the U.S. Energy Information Administration (EIA) in its monthly Short-term Energy Outlook (STEO)maintained their forecast of an oversupplied market by early next year, thereby indirectly agreeing with OPEC+ and their steady approach to rising productionon a monthly basis by 400,000 barrels per day. The bullish market reaction to bearish news which included a forecast for rising US production, sprung out of the fact the Biden administration who earlier in the week had signaled they would announce an SPR release on Tuesday stepped away from doing so.
Crude oil jumped to near the recent high with no prospect for additional supplies to alleviatesome of these concerns. So far today the oil market trades close to flat with falling gas prices in Europe potentially reducing some of the recent gas-to-oil switch support for oil.
A counter to EIA’s argument about a balancing market in early 2022 was given by Russell Hardy, the head of Vitol Group, the world’s biggest independent oil trader. Speaking online at the Reuters Commodity Trading Conference on Tuesday he said that global oil demand is back to 2019 levels and will exceed those during the first quarter of 2022. Not ruling out $100 per barrel Brent in 2022 he said oil market tightness will continue for the next 12 months with OPEC spare capacity down to between 2 and 3 million barrels per day.
Ahead of today’s weekly stock report from the EIA, the American Petroleum Institute late yesterday reported a price supportive 2.5-million-barrel drop in crude stocks and a near 8-million-barrel combined drop in gasoline and distillate stocks. The market will also be keeping an eye on flows in and out of Cushing, Oklahoma, the key delivery hub for WTI crude oil futures. A month-long drop in stocks to 26.4 million barrels, some 4.6 million above the August 2018 low, has supported the front end of the WTI curve resulting in very steep backwardations with the spot month of December trading some 11 dollars per barrel above the December 22 contract. The equivalent 12 month spread in Brent trades somewhat lower at 8.75 dollars per barrel.
As per the WTI chart below, the recent recovery has taken the price close to $85 and a potential breakout. Brent meanwhile currently sits around two dollars below a double top at $86.75. Whether or not the price will break higher at this stage will to a large extend depend on developments in the gas market, not least in Europe.
The Dutch TTF benchmark gas contract trades lower for a second day with a slump to a six-week low being driven by signs that Russia is gradually delivering the promised boost in supplies. The current price for first month gas trades at €64.3 per GWh or in dollar terms the equivalent of $21.75 per therm, a level that if maintained could slow the recent switch from gas to relatively cheaper priced fuels such as diesel, heating oil and propane.
With total gas held in storage facilities across Europe still trailing the five-year average by around 16 percent, a strong pick up in supplies via LNG imports and most importantly from Russia is needed to add further downside pressure on the price of gas, and with that also electricity prices. Traders will be watching next Monday’s auctions for December pipeline capacity as it will give a clear signal at a time where the market remains concerned that additional shipments from Russia could still be tied with the progress in the certification of the controversial Nord Stream 2 pipeline.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
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/en-gb/legal/disclaimer/saxo-disclaimer)
