Crude oil: China demand threat vs another OPEC+ cut Crude oil: China demand threat vs another OPEC+ cut Crude oil: China demand threat vs another OPEC+ cut

Crude oil: China demand threat vs another OPEC+ cut

Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil made a sharp U-turn on Monday with Brent and WTI finding a bid following a near 19-dollar drop since early November on continued and escalating concerns about the demand outlook in China. Forcing the change in direction was increased speculation that OPEC+ faced with the risk of a deeper, and in their opinion unwarrented slump, would consider deeper supply cuts when the group meets next week.


Saxo's Daily Financial Markets Quick Take
Podcast: Markets taking a strong view that Fed will succeed


Crude oil made a sharp U-turn on Monday with Brent and WTI finding a bid following a near 19-dollar drop since early November on continued and escalating concerns about the demand outlook in China as protests against the country’s Covid-zero strategy spread. The slowdown in demand from China will be temporary but having unsuccessfully fought Covid outbreaks with lockdowns for months, the prospect for an improvement looks month away and with the added risk of an economic slowdown reducing demand elsewhere, traders have increasingly been forced to change their short-term outlook.

Before Monday’s turnaround both Brent and WTI crude oil had seen an increased amount of technical and momentum selling from money managers, and during a three week period to November 22, the total net long was cut by 31% to 310k lots, a three-month low. Hardest hit has been Brent crude which in the week to November 22 saw money managers cut bullish bets by one-third or 71k lots to 138k lots. This the sixth biggest weekly reduction on record cut the net long to a 3-month low and second lowest of the year.

Prompting this loss of momentum and long liquidation has been a return to contango at the front end of the futures curve. The current prompt spread, being Jan23 and Feb23 traded as low as -70 cents on Monday, a level that was last seen in May 2020 during the peak pandemic scare. 

What prompted the latest turnaround which so far has seen Brent recover 5% from Monday’s low point near $80 per barrel has been fresh speculation that OPEC+ may consider an additional production cut on top of the 2 million barrel per day for November that was agreed at their latest meeting. 

With Russian oil production struggling amid sanctions, an additional cut for December will once again primarily be carried out by the four major Middle East producers of Saudi Arabia, UAE, Kuwait and Iraq. The meeting will be clouded by uncertainty given the unfolding developments in China, the EU embargo on Russian seaborne crude oil sales also beginning next week while the US treasury market is pricing in a near certain recession emerging in the US sometime next year. Ultimately the group, led by Saudi Arabia is looking for price stability, preferably in the 90’s for Brent, and with that in mind a strong signal of support or an actual cut in production can not be ruled out. 

Technical update on Brent crude oil from Kim Cramer, our Technical Analyst. The update also takes a closer look at WTI crude oil, Dutch TTF gas and Henry Hub natural gas. 

During yesterday’s session Brent Crude oil broke below support at $83.65 and the 0.786 Fibonacci retracement at $81.43 but later on managed to close above, thereby forming a Hammer candle which potentially could signal a bottom and reversal. A bullish candle today could signal a reversal from the current downtrend, signaling a recovery to around $92.32, the 0.618 retracement of the November selloff. However, to reverse the overall medium-term bearish picture a weekly close above $99.56 is needed. The RSI, currently in a downtrend is showing negative sentiment with a break above potentially signaling a reversal that could see crude oil prices move higher. Renewed selling taking Brent below $82.40 could trigger an downward extension to $77 or possibly lower.

Source: Saxo
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 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 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/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.