Crude oil rangebound with focus on inventories
Head of Commodity Strategy
The alternating focus between supply and demand, both of which are currently challenged, have led to crude oil’s rangebound trading behaviour since April. The short-term outlook points to support with rising crude oil production from several Opec members and Russia unlikely to be enough to meet the shortfall from Venezuela and particularly Iran as US sanctions begin to bite.
The recent run-up from support at the 200-day moving average in both WTI and Brent crude ran out of steam earlier this week. This after the break above $78.50/barrel on Brent crude oil resulted in another failed attack and subsequent retracement from the technical and psychological important area around $80/b.
Production surveys from both Bloomberg and Platts this week showed how Opec so far had been able to offset a beginning slowdown in production from Iran. With most of the increased being contributed by one-off increases, especially from Libya, the outlook still points to a period where Opec’s total production is likely to drop as the Iranian slowdown accelerates.
Rising oil prices due to the short-term impact of US sanctions may, however, create a medium-term challenge for demand growth. This as emerging markets, the main source of demand growth, suffer from a perfect storm of rising oil prices and weaker currencies.
We maintain the view that crude oil is likely to remain rangebound and that a potential spike above $80/b could turn out to be short-lived. While Brent crude trades well below the $110/b average seen between 2011 and 2014, some key oil-consuming nations are seeing prices in their local currencies at or even above that level.
Following three weeks of net selling, funds turned aggressive buyers of crude oil (Brent in particular) in the week to August 28. In total, funds bought 126,000 lots of oil and products with the 65,000 increase in Brent being the biggest weekly jump since December 2016 when the Opec+ group announced its plan to curb production. The buying is likely to have continued up until Monday before Tuesday’s failed attempt at $80/b helped trigger profit-taking.
A slowdown of this magnitude would go a long way to offset the potential drop in supply from Iran. Such a development, together with the already heightened risks to overall demand going into 2019, could force a rethink of the medium-term price outlook and help send the price back down to $70/b and potentially even beyond.
While this is currently only speculation, the one thing that remains a fact is that Iran will suffer a further slowdown in production and exports over the coming months. Until hard data or monthly surveys from Opec and IEA begin to show demand softness, the upside risk will still be viewed as the direction of least resistance.
Later today at 15:00 CET (one day and half an hour later than usual) the Energy Information Administration will release its Weekly Petroleum Status Report. Crude oil has ticked a bit higher today ahead of the report on a combination of a softer dollar and surveys pointing to a third weekly drop in nationwide crude stocks.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
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)