Oil lower as yields rise and IEA talks down super-cycle risks

Oil lower as yields rise and IEA talks down super-cycle risks

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil continues to show signs of having reached its short-term potential with the current weakness being driven by a combination of rising US bond yields ahead of today's FOMC meeting and after the International Energy Agency toned down the potential for a tight supply driven super-cycle in crude oil.


What is our trading focus?

OILUKMAY21 – Brent Crude Oil (May)
OILUSAPR21 – WTI Crude Oil (April)

____________________________________________________________________________________________________

Crude oil continues to show signs of having reached its short-term potential with the return to the lower end of its current range being driven by a combination of rising US bond yields ahead of today’s FOMC meeting and after the International Energy Agency toned down the potential for a super-cycle in crude oil.

In their latest monthly Oil Market Report, the IEA raised questions about some of the reasons that has supported Brent crude oil’s recent surge to $70/b. Especially the risk of a new super-cycle and a looming shortfall was given a cold shoulder. Not only do they see ample oil inventories despite a steady decline from the massive overhang that piled up during 2Q20. The also highlighted the hefty amount of spare production capacity, currently in the region of 8 million barrels/day that is being held back by OPEC+ members.

With the recovery in fuel demand still fragile, global demand look set to grow by 5.5 million barrels/day in 2021 according to averaged estimates from IEA, EIA and OPEC, and it will not return to pre pandemic demand levels before 2023. With these developments in mind it is clear that the 80% rally since early November, when the first vaccine news broke, has primarily been driven by OPEC+ withholding production.

In a couple of recent interviews I said that OPEC+ following their March rollover of production will have to increase production in April. Failure to do so could risk send the price of oil lower as the market would see that as a sign of continued demand weakness. Keeping production tight in order to send the price higher into a still weak demand outlook may prove to be counterproductive at this stage in the recovery.

Adding to the markets current unease is the relentless rise in US bond yields which has strengthened the dollar and inadvertently helped reduce the risk appetite across markets, not least commodities where speculators up until recently held a record long position across 24 major commodity futures.

Brent crude oil trades lower for a fifth day, its longest run of losses in six months. While resistance has been established above $70/b, support has yet to be established. Focus on the 21-day moving average, currently at $66.40 followed by $65, the trendline from the November low.

Source: Saxo Group

The weekly Commitment of Traders report from the U.S. CFTC breaks down the open interest in commodity futures between producers, swap dealers and money managers or speculators. In the latest update covering the week to March 9 we found that during the past four weeks the 12% rally in crude oil had triggered no additional increase in the combined speculative net long in Brent and WTI crude oil. While rising US bond yields and the stronger dollar, as mentioned, has lowered the general level of investment appetite, these developments also support our view that crude oil has reached a level beyond which can be hard to justify given current fundamentals.

Before today’s main event, the FOMC announcement at 1800 GMT, the US EIA will release its weekly crude and fuel stock report at 1430 GMT, also an hour earlier than normal due to US summertime. Given the result from last nights industry report from the American Petroleum Institute and surveys ahead of today’s release, the market is looking for a return to normal. This following the aftermath of the Texas freeze debacle which helped trigger two weeks of crazy data with refinery outages driven a surge in oil stocks and a record slump in gasoline and distillate stocks.

I will publish the results on my Twitter feed @ole_s_hansen, but with the focus squarely on today's main event, the FOMC meeting, the market impact is likely to be limited.

Earlier in the week I was invited onto the weekly Half-time Talk show organized by Gulf Intelligence in the UAE and published today Wednesday. During our 20 minutes conversation we talked about the super-cycle, what may drive it and more specifically took a closer look at current oil market fundamentals.

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