COMMODITIES 5 minutes to read

Crude oil stuck with supply and demand both challenged

Ole Hansen

Head of Commodity Strategy, Saxo Bank Group

Summary:  The Venezuelan political crisis as well as a Saudi pledge to lower output further should have boosted crude oil, but pulling in the opposite direction are heightened concerns about global growth, particularly that of China.


During the past few days crude oil has been presented with plenty of reasons to resume the rally that stalled in recent weeks.  Crude oil production in Venezuela, and especially exports to the US, are expected to drop in response to the growing political crisis and the US implementing new sanctions against its state-run oil company, PDVSA. Additional updates on the sanctions and its potential impact can be found here from Reuters and S&P Global Platts.

Adding to the support has been a pledge from Saudi’s oil minister Falih to make even deeper cuts in February below the voluntary 10.3 million barrels/day production cap recently agreed with the Opec+ group of producers.
Instead of focusing on emerging supply risks, crude oil instead dropped the most in a month yesterday as macroeconomic concerns continued to raise concerns about a not yet realised slowdown in demand. Once again these concerns involved China given the current weakness being recorded in economic data and in earnings from companies doing business in China.

Disappointing earnings from Caterpillar Inc. (heavy machinery) to Nvidia Corp (computer chips) were both blamed on a sudden slowdown in demand from China, a country which accounts for a major share of global oil demand growth and which contributes about a third of global growth. 

On Wednesday high level trade talks between China and US will resume in Washington. Tensions, however, worsened yesterday after US prosecutors filed criminal charges against China’s Huawei. In addition the US may on the same day file a formal extradition request to Canada for Huawei’s CFO Meng Wanzhou, the daughter of the company’s founder. 

These macroeconomic and geopolitical developments continue to support an elevated correlation between crude oil and the S&P 500 index, a proxy for growth expectations. 
The above-mentioned developments highlights why the oil market remains range-bound with the focus evenly split between supply and demand concerns. However, not all oils are equal and the prospect of lower supply of heavy barrels from Venezuela has supported a pick-up in the price of heavy crude oil varieties from Mexico and Canada. 

Brent and WTI crude oil meanwhile remain stuck in their established ranges with plenty of potential market moving events presenting themselves over the next 48 hours. The three most important are US-China trade talks in Washington, EIA’s weekly stock report and the Federal Open Market Committee meeting.
Source: Saxo Bank

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)