Production cut extension likely to support, not turbocharge crude oil prices Production cut extension likely to support, not turbocharge crude oil prices Production cut extension likely to support, not turbocharge crude oil prices

Production cut extension likely to support, not turbocharge crude oil prices

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil prices rose on Tuesday after Saudi Arabia and Russia announced an extension to current production and export cuts to yearend. We see the extension being driven by Saudi Arabia’s desire to keep stable to higher prices into a period where macroeconomic concerns continue to weigh and demand for crude oil slows as maintenance cut refinery demand. In Brent, the medium-term uptrend is still firm with trendline support currently at $84.25, potentially being the bottom of a new higher range supported by OPEC’s active management of supply


Global Market Quick Take: Europe


Crude oil prices rose on Tuesday after Saudi Arabia and Russia announced an extension to current production and export cuts to yearend. Brent crude oil traded above $90 for the first time since November while WTI, which in recent weeks have led the rally amid falling domestic crude stocks, touched $88 before running out of steam, partly due to the fact an extension was expected and was already partly priced in.

We see the extension being driven by Saudi Arabia’s desire to keep stable to higher prices into a period where macroeconomic concerns continue to weigh and demand for crude oil slows as maintenance cut refinery demand. Not least in Saudi Arabia where refinery maintenance from October will cut capacity by 0.73 million barrels per day (Source: Energy Aspect) thereby leaving more crude oil available for exports into a period where overall demand is likely to slow past the peak summer travel season.  

OPEC’s production stood at 27.8 million barrels per day last month (Source: Bloomberg), a year-on-year decline of 1.8 million barrels per day and lowest since October 2021 when global demand was still in post-pandemic recovery phase. During the same period, the estimated production capacity has held steady at around 34 million barrels per day, thereby lifting the available spare capacity above 6 million barrels per day. Rising spare capacity and rising crude oil prices rarely go hand in hand that well, and it highlights the fact that the current tightness is driven by political decisions, not because the world is running out of oil.

China’s demand for crude oil is currently strong, driven by stock building and demand from refineries, some of which is reexported as fuel products. Rising oil prices into a slowing economy, not only in China, but also in Europe and later this year, potentially also the US does not in our opinion support sharply higher prices. A risk reflected in the positions held by managed money accounts, such as hedge funds and CTAs.

In addition, higher oil prices may trigger a production response from producers both in and outside of OPEC, the latter from the three producers (Iran, Libya and Venezuela) not bound by quotas and who have raised production by 0.8 million barrels per day during the past year.

Since the current uptrend began back in early July - when the unilateral production cut was announced by Saudi Arabia, WTI has rallied by 22% and Brent by 18.5%. During this time, however, the managed money position in WTI and Brent has only risen by 158.5k contracts or 158.5 million barrels to 390k contracts, well below the February peak at 491k contracts. Breaking down the increase we find the change has primarily been driven by 102.6k contracts of short covering while the gross long has only increased by 55.9k.

Do note that this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness. The fact that the strong momentum since July has not triggered a bigger appetite for crude oil exposure highlights the politically driven nature of the current tightness and the weakening macroeconomic backdrop.

Source: EIA

For now, tight market conditions are still on clear display through the elevated backwardation shown across the forward price curve, not least at the very front where prompt spreads in WTI and Brent both commanding a backwardation around 65 cents per barrel, up from close to flat around the time Saudi production cuts were implemented. While the upside in our opinion remains limited there is no doubt that the current production cuts will keep the oil market tight, thereby providing support for oil prices, but whether that support translate to stable or higher prices will depend on incoming macro-economic data, and with that the outlook for demand.

From a technical perspective, Brent has been in a bullish uptrend since July and needs to hold support at $89 as a break may trigger long liquidation towards $87.5 from traders who bought the production cut extension news. In addition, the RSI is showing divergence ie the uptrend is stretched short-term. However, the medium-term uptrend is still firm with trendline support currently at $84.25, potentially being the bottom of a new higher range supported by OPEC’s active management of supply. We do not join the $100 per barrel camp but will not rule out a relative short period where Brent could trade above $90.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 07

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
  • The rise of populism: Far-right parties will influence the future

    The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

    Read article
  • Investing in China: Navigating Q1 amid economic challenges

    Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

    Read article
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.