WCU: Oil prices falter as macro fears rise

Commodities 10 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil appears poised for a decline as macroeconomic concerns move to the forefront.


Global commodity prices stayed on the defensive for a second week with losses seen across all sectors apart from precious metals and livestock. The global central bank policy panic that emerged in the US following the December stock market thrashing spread to Europe as Thursday’s European Central Bank meeting saw the bank slash its (still overly high) growth forecast while delivering fresh stimulus. 

Global growth is slowing and a trade deal between the US and China is unlikely to “save the world” at this stage. It may even create some disappointment given how much markets have rallied ahead of the expected announcement. China, the growth engine of the world, has seen its growth targets being reduced while February exports slumped the most in three years. 

On Friday, the CSI 300 index dropped 4% after the market interpreted a rare sell rating from the nation’s largest brokerage as a sign that the government wants to curb excessive gains of close to one-third since early January. 

The Bloomberg G10 currency index rose 0.7% while EURUSD, the world’s most-traded currency pair dropped to €1.1180, a 21-month low before recovering following a weaker-than-expected US job report. The Japanese yen, meanwhile, stood up to the dollar and rallied against all Asian and G10 currencies on renewed safe-haven demand.
Bloomberg Commodity Index
Source: Bloomberg
The energy sector traded lower with only gasoline and natural gas managing to hold onto small gains. Opec+ production cuts, a big seasonal drop in US product stocks and continued concerns about developments in Venezuela have so far prevented bullish funds from hitting the sell button. However, with the mentioned risk of lower growth leading to lower demand we see the risk increasingly skewed to the downside. 

The US Commodity Futures Trading Commission has finally caught up following the December-January government shutdown. From the week ending March 5, the Commitment of Traders reports covering positioning in commodities, forex, bonds and stock index futures will once again be “live” and actionable. 

The last delayed report, covering the week to February 26, highlighted the dismal sentiment across key agriculture commodities. With sugar, bean oil and live cattle currently being the only such commodities showing positive returns this year, it is no surprise to find hedge funds (bar a few exceptions) holding elevated net-short positions across the sector.  

The grain sector in particular needs supportive news as the global overhang of supply continues to weigh. At the time of writing, the market was awaiting a monthly supply and demand report from the US Department of Agriculture. 

The reason why we primarily focus on hedge funds is because they are likely to have tight stops and no underlying exposure that is being hedged. This makes them most reactive to changes in fundamental or technical price developments. It provides views about major trends but also helps to decipher when a reversal is looming.
Funds positioning
Source: Bloomberg, Saxo Bank
Weaker stocks, lower bond yields and a stronger Japanese yen helped gold recover despite the headwind from general dollar strength, especially against the euro. Key support at $1,276/oz has so far not been challenged but at this stage a recovery back above $1,305/oz is needed to attract renewed demand and short-covering from hedge funds, who according to recent COT reports were wrong-footed near the recent high. 

In the week to February 19 when gold surged higher, they increased their net-long by close to 4.5 million ounces (45,000 futures lots). Investors in exchange-traded funds backed by bullion have reduced total holdings on a near-daily basis since January 31.

Central bank demand for gold, meanwhile, seems set to continue. Following the strongest year of buying since the early 1970s, the recent weakness is likely to have attracted continued demand for reasons that vary from so-called de-dollarisation – reducing dependence on the dollar – to worries about rising macroeconomic and geopolitical pressures. While Russia, Turkey and India were big buyers in 2018, China has now bought 29 tons during the past three months following a hiatus of more than two years.

Gold traders remain nervous following another of numerous failures to break higher since 2016. However, having retraced less than 38.2% of the August-February rally, the market remains in an uptrend and only a break below $1,254/oz will change the status back to neutral. 
XAUUSD
Source: Saxo Bank
We view the sideways trading in crude oil during the past three weeks as potentially building up to a correction. During this time, the market has received plenty of supporting news such as falling production from the Opec+ group of producers, increased hopes for a trade deal and not least the deteriorating situation in Venezuela. 

The weakening global growth outlook has been less of a focus given robust forecasts for global demand growth. This may change after the OECD lowered its global growth outlook this past week, saying that “vulnerabilities in China, Europe and financial markets could derail the global economy”. Next week the EIA, Opec and IEA will all deliver their monthly oil market reports and the market will be looking out for any potential downgrades to demand.

In the US, crude oil production has reached a record 12.1 million barrels/day. The Federal Reserve Bank of Dallas’ recent energy update survey found that US shale oil producers in the high-growth area around Permian, Texas need less than $50/b to break even on new wells.

Operating expenses on existing wells in the same area, meanwhile, are covered as long the price stays above $30/b. 

The break below $55.5/b on Friday could see WTI crude oil target $52/b ahead of the big level at $50/b.
Crude oil
Source: Saxo Bank

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • 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

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

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