Head of Commodity Strategy, Saxo Bank Group
Summary: The Opec+ deal to curb production over the coming months has helped stabilise crude oil, but the market remains worried about the ongoing US-China trade war and its potential negative impact on growth and demand into 2019.
The Opec+ deal to curb production to the tune of 1.2m b/d over the coming months has helped stabilise and potentially create a floor in crude oil. However, while the supply outlook has steadied and created some support this week, the market remains worried about the ongoing trade war between the US and China and its potential negative impact on growth and demand into 2019.
Headline risks, will in other words, continue to be a key driver as we head into the low liquidity part of the year ahead of Christmas and New Year. On that basis the short-term focus in the oil market is less the US Permian Basin, Moscow and Riyadh but more Washington and Beijing. With the political influence on oil prices remaining very elevated we doubt that we will see any major new positioning before a clearer picture emerges.
China's demand for commodities have become more selective this year with natural gas seeing a continued strong rise in demand as the country step up its fight against pollution. Soybeans have been the biggest casualty of the trade war with imports showing a dramatic drop of 4% after rising by 16% during the same period last year. The rise in crude oil imports between January and November has slowed to 8.2%, the lowest annual increase in five years.
A change in the technical and/or fundamental outlook towards a more price-friendly outlook could trigger a strong buy reaction from hedge funds, which have seen a record capitulation in crude oil longs in recent months. The net-long has dropped to just 265 million barrels, a three-year low, and a level from where two strong recoveries have been seen since August 2016.
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