Crude oil: US to accelerate SPR drain? OPEC+ won't move needle
Head of Commodity Strategy
Summary: The turmoil seen across the commodity sector since Russia invaded Ukraine has yet to show any signs of easing. Volatility remains very elevated, not least across the energy sector with the result being reduced positioning and more erratic trading behavior with conviction levels at a very low level. Adding to the current state of uncertainty the market will be focusing on the US administration for signs of an accelerated SPR release and today's OPEC+ meeting which in advance has been written off as another non-event.
The turmoil seen across the commodity sector since Russia invaded Ukraine has yet to show any signs of easing. Volatility remains very elevated, not least across the energy sector which has reached levels last seen during the pandemic panic in early 2020. The result being reduced positioning and more erratic trading behavior with conviction levels at a very low level.
While the main driver remains lack of Russian supplies due to self-sanctioning by traders, the market has also been trying to gauge the negative demand impact current covid outbreaks and lockdowns in China, a so far illusive Iran nuclear deal potentially adding barrels, the level of demand destruction from rising prices and developments in the US bond markets increasingly pointing to an economic slowdown into the second half of 2022 and beyond.
The result of all these being a market were traders lack conviction and where raised margin calls and a misfunctioning physical market has left normal trading/hedging strategies challenged. High volatility reduces trader conviction and their ability to hold onto a strategy, and the result has been a sharp reduction in the number of open positions held in key energy futures from crude oil and products to European gas. Excluding the latter the open interest across the five main oil and fuel futures contracts has slumped to a seven-year low.
Having spent the past five weeks within a 96 to 136-dollar range, raised but yet illusive hopes for a peace deal between Russia and Ukraine as well as the mentioning reduction in Chinese demand have all helped steer the price back down towards the lower part of that range.
Overnight the price dropped by an additional $5 per barrel in a matter of minutes with Brent touching $107 per barrel on news the Biden administration is considering a plan to release a million barrels of crude oil a day from Strategic Reserves for several months, to combat rising inflation and to offset losses from Russia. A release of this magnitude, potentially lasting for six months would go some way to minimize to risk of even higher prices, but it does not solve the long-term structural problem where lack of investments will make it difficult to increased production by the +5 million barrels a year that is needed to maintain global production at current levels.
In other oil related news, OPEC+ meets virtually today and without addressing slumping exports from Russia they are likely to rubberstamp an already agreed but increasingly impossible to achieve increase of 432k b/d, higher than the usual 400k due to fine tuning of individual nations production quotas.
In our soon to be published outlook for the third quarter we highlight the reasons why Brent is likely to trade within a 90 to 120-dollar range, now subject to an adjustment should the SPR released be announce, potentially as early as today. In the short-term, Brent weakness below the 21-day moving average for a third day signals loss of momentum with the next support being the $101.50 to $102 area.
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.
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