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Commodities 5 minutes to read

Oil hit by recession fears but downside is limited

Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil’s roller-coaster ride continues to create a very challenging environment with the focus alternating between tight supply and the global economic slowdown's impact on future demand growth.


The difficulty in navigating a market with several and major opposing forces was laid bare last week when following a period of rangebound trading Brent crude oil suddenly collapsed. The slump towards key support at $60/barrel was triggered by President Trump’s decision to open another front in the already escalating trade war with China. However, his decision to use the tariff weapon against Mexico in order to force a reduction in the flow of migrants from Central America was rounded upon by business as potentially accelerating an already visible economic slowdown.

The recession themed sell-off has in our opinion potentially already  run its course after Brent crude found support ahead of key support at $60/b. A break below would signal a potential return to the December low which current fundamentals just simply don’t support. The short-term outlook nevertheless hinges on the performance of US stocks and whether speculative longs need to reduce bullish bets further. 
Source: Saxo Bank
A month that began with elevated speculative longs looking for the market to be supported by tight supply and Middle East tensions, turned on its head with WTI futures in New York posting its worst monthly performance in seven years. According to the latest Commitments of Traders report covering the week to May 28, speculators cut the combined net-long in WTI and Brent crude to a three-months low. 

For the first time during this recent reduction Brent crude was not immune with the tight supply focus switching to increased risk of lower growth and demand. The 41k lots Brent reduction to 353k was the biggest since last November while the 53% jump in the gross short to 50k lots was the biggest since October.
Opec, led by Saudi Arabia, is now likely to increase its resolve to maintain pricesupportive production cuts beyond the current six-month period. The cartel meets later this month and with Saudi Arabia and others picking up market share from Iran, a contentious meeting lies in store. Helping this process has been news that Russia  produced less than its target for the first time since the current deal to cut supply was struck. However, the daily production of 11.114 million barrels/day, which is 76,000 barrels/day below the cap, was in response to the Druzhba pipeline contamination which reduced exports to Europe during the month. 

The monthly Opec oil production survey from Bloomberg published today found that the overall production level held steady in May with reductions from Kuwait (-40 kbp) and not least sanctions-hit Iran (-230 kbp) being offset by increases from Saudi Arabia (+170 kbp), Libya (+60 kbp) and Iraq (+50 kbp). 
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