Head of Commodity Strategy
Summary: Crude oil has managed to find support following a sharp correction that took Brent and WTI below the ranges that had prevailed since June. Upbeat economic data from China and the U.S., tropical storms building across the Atlantic and a recovery in U.S. megacap stocks have all helped drive renewed risk appetite. Next up the weekly stock report from the EIA which, according to the API, may yield a surprise inventory reduction.
What is our trading focus?
OILUKNOV20 – Brent Crude Oil (November)
OILUSOCT20 – WTI Crude Oil (October)
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WTI Crude Oil (OILUSOCT20) and Brent Crude Oil (OILUKNOV20) have both managed to find support following their recent sharp correction and break below the trend that had prevailed since June. Upbeat economic data from China and the U.S. the world's biggest consumers, tropical storms building across the Atlantic and a recovery in U.S. megacap stocks have all helped drive renewed risk appetite.
After briefly dipping below the 100-day moving average, Brent crude oil on several consecutive days managed to bounce from an area below $39.50/b. Using Fibonacci retracement as a guide to where resistance may emerge we are focusing on $42/b (38.2% retracement) followed by $43/b (50%.
However, as the pandemic continue to slow the recovery in fuel demand, the upside potential in our opinion is likely to remain limited over the coming months. With that in mind and given the risk of increased production from Libya, we see Brent crude oil settling into a new lower range around $40/b before eventually moving higher into year end and 2021.
The 15% and 18% corrections in Brent and WTI respectively have not only helped bring the price of crude oil more in line with current fundamentals, which IEA, OPEC and BP in recent updates, have described as fragile. Another impact of the correction has been a sharp reduction in speculative longs held by funds. A development that has allowed the market to become more receptive to price supportive news.
In the latest Commitment of Traders report covering the week to September 8, funds cut their net-long in crude oil and product futures by 28%, the biggest weekly reduction in more than two years. Now consider that around half the reduction was driven by fresh short selling, these recently established short positions are now at risk of getting squeezed should prices continue higher.
Before turning the attention to the OPEC+ JMMC committee meeting on Thursday, the market will be focusing on today’s “Weekly Petroleum Status Report” from the U.S. Energy Information Administration. The market received a further boost overnight after American Petroleum Institute surprised the market by reporting a 9.5 million barrels decline last week. A contradiction to surveys looking for a build of around 2 million barrels.
Equally important this week will be the level of refinery demand given stalling growth in fuel demand and elevated stocks of products, not least distillates such as diesel and jet fuel.
As per usual I will publish the result of the report on my Twitter handle @Ole_S_Hansen
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Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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