Head of Commodity Strategy
Summary: Crude oil is increasingly showing signs of having entered a period of consolidation after rallying by one-third since August. In this update we highlight some of the reason behind the recent weakness, most of which we believe to have a temporary impact, and not strong enough to prevent even higher prices towards yearend and into 2022
Crude oil is increasingly showing signs of having entered a period of consolidation and following a two-month rally which up until recently had lifted the price of Brent and WTI crude oil by close to one-third, it can be argued it was overdue. However, we only expect this phase to be temporary with the strong fundamental reasons having supported the surge not gone away. With this in mind, we still see the risk of even higher prices towards yearend and into 2022.
Some of the reasons why oil prices have softened this past week are highlighted below. It is worth keeping in mind that several of these could quickly turn around and become price supportive again.
Against these mostly short-term developments, the oil market will still be facing years of potential under investments with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand but increasingly also due to lending restrictions being put on banks and investors due to ESG and the green transformation focus.
Following yesterday’s near four percent correction, the oil market has already managed to find a bid ahead of the OPEC+ meeting which is due to start at 3 PM CET. Looking at the chart WTI managed to find support just below $80/b, a level which apart from being psychological also reflects a 23.6% retracement of the August to October rally.
Whether the short-term trading range will be $80 to $85 or potentially some three to four dollars lower, will to high degree be determined by the outcome of today’s meeting and next week by the gas market when we will find out if Russia, as promised, will boost gas supplies to Europe, thereby potential softening prices further.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
