Crude drops on growth concerns and loss of momentum Crude drops on growth concerns and loss of momentum Crude drops on growth concerns and loss of momentum

Crude drops on growth concerns and loss of momentum

Ole Hansen

Head of Commodity Strategy

Summary:  Brent crude trades below $80 for the first time since early January as worries about the 2023 economic outlook drives fresh technical selling and long liquidation from traders and investors cutting exposure ahead of yearend. The coming months are likely to remain challenging given an uncertain outlook for both supply and demand, as traders weigh the risk of a recession against a revival in Chinese demand, as well as the impact of continued sanctions against Russia, and not least the risk of another round of OPEC+ intervention to support prices.


Brent continues to lose ground and after closing below $80 on Tuesday for the first time since early January some added follow-through selling took it down to $77.74 earlier today before bouncing. WTI meanwhile touched $72.75, a one-year low, before finding bids. Both futures contracts have come under pressure this past week on fading risk appetite as the attention turns to 2023 and increased worries about an economic slowdown hurting demand. The slump comes against a backdrop of low liquidity with Brent open interest falling to a seven-year low, thereby stoking unwarranted volatility.

The front end of the curve has seen the brunt of the weakness with time spreads weakening to the extent that the difference between the first and the sixth month Brent futures contract, the global benchmark, has returned to a contango for the first time since November 2020. At the peak of uncertainty following the Russian invasion back in March the spot month Brent contract traded 24% above the one year forward contract. By yesterday that premium had shrunk to just 2%, highlighting the extent to which sentiment has changed during the past month.

The Brent crude oil curve has seen a dramatic downward shift during the past month, primarily led by weakness at the front of the curve. 

Source: Bloomberg

Supply and demand driven refinery margins are good indicators of the given strength of the market and during the past couple of weeks they have increasingly been signalling weakness. Not only in gasoline margins which for months has been seen as an inconvenient by-product for in-demand diesel production, but also diesel margins are now showing signs of cracking following a period of strong demand as European refineries boosted production and demand ahead of sanctions-led supply disruptions from Russia.

The short-term outlook is challenged due to a seasonal slowdown in demand and the negative price momentum feeding additional selling from technical traders and funds closing long positions ahead of yearend. The outlook for 2023, however, remains clouded with traders weighing the risk of a recession against a revival in Chinese demand as well as the impact of continued sanctions against Russia.

In addition, the market must also consider the risk of further OPEC+ intervention to arrest the slide through additional production cuts, while the selling of crude oil from US strategic reserves, which has sent more than 200 million barrels into the market this year, will halt soon. With US commercial crude oil stocks only up 1 million barrels this year and diesel stocks at their lowest seasonal level in eight years, the additional barrels have been shipped abroad as crude and refined products, especially to Europe which in normal times imported more than 50% of its refined products from Russia. 

Update from Kim Cramer, our technical analyst.

Brent Crude oil: Following Tuesday’s close below $80.61, Brent has cancelled its bottom and reversal pattern from last week and the bear trend has resumed. Trading in a wide falling channel Brent crude oil has so found support ahead of $77.56, the 0.50 retracement of the entire uptrend since its trough in early 2020. Below, there is no major support until around 65. Weekly RSI is back below 40, thereby supporting the short-term negative outlook.

Source: Saxo
Disclaimer

The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.