Crude oil squeezing higher with focus on US-China talks

Crude oil squeezing higher with focus on US-China talks

Commodities 4 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Raised hopes of a US-China trade deal driving stocks higher, a softer dollar and output cuts have supported oil following its December collapse, but worries about the global economy still nag.


Brent crude oil has returned to $60/barrel while WTI has moved back above $50/b as hopes of a deal between the US and China on trade continues to build. Yesterday, US President Trump tweeted: “Talks with China are going very well” and that was followed by news of an unplanned extension of the talks into Wednesday. These developments have supported a continued recovery in global stocks following a miserable December. Adding to this are a softer dollar and ongoing production cuts from the Opec+ group, which have all supported the current change in sentiment. 

After finding support at $50/b last month Brent crude has swiftly returned to the November-to-December consolidation area between $57.50/b and $64/b:
Source: Saxo Bank
A trade deal between the US and China, however, is likely to slow but unlikely to reverse the deterioration seen recently in forward-looking economic data from the US to Europe and China. On that basis the upside at this stage may be limited to the upper area of the mentioned consolidation area for Brent at $64/b and WTI at $55/b. 

Another reason why the bulls may need to be patient can be seen in the developments of the forward curve and the open interest in the two major oil contracts of WTI and Brent. A rally driven by fundamentals, such as the outlook for a tightening, would normally trigger a flattening of the forward curve, as the contango – the prompt months discount to deferred – begins to narrow.

As per the chart below we find that the six months spread between February (CLG9) and August (CLQ9) has hardly moved since December. Hedge funds would normally during a rally cut short positions while adding fresh longs. However, since the December 24 low the open interest in WTI has only risen by 61k lots while in Brent it has only risen by 36k lots. This could indicate that the rally has been short covering more than fresh longs entering the market. 

Please note that due to the US government shutdown the CFTC has not issued any Commitments of Traders reports since the week of December 18. The COT report provides an important weekly insight into the size and direction of positions held by hedge funds across key futures markets from currencies to bonds and not least commodities. 
Later today at the usual time of 15:30 GMT the EIA will publish its Weekly Petroleum Status Report. The recent trend towards falling crude stocks and a rapid build in products look set to continue if API’s data and surveys are correct.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

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. Android is a trademark of Google Inc.

©   since 1992