Rising investment and physical demand drive oil towards 2021 high

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Commodities of most colors continue higher on a combination of expectations for a post-pandemic growth sprint triggering supply bottlenecks, green transformation focus, weather worries and increased investment demand from speculators and investors enjoying the current momentum while seeking a hedge against the risk of accelerating inflation. One of main sectors benefitting from increased investment demand is energy, most noticeable crude oil.


What is our trading focus?

OILUKJUL21 – Brent Crude Oil (July)
OILUSJUN21 – WTI Crude Oil (June)
GASOLINEJUN21 - RBOB Gasoline (June)

____________________________________________________________________________________________________

Commodities of most colors continue higher on a combination of expectations for a post-pandemic growth sprint triggering supply bottlenecks, green transformation focus, weather worries and increased investment demand from speculators and investors enjoying the current momentum while seeking a hedge against the risk of accelerating inflation. As a result the broad Bloomberg Commodity Spot index trades up 19% year-to-date with the year-on-year increase exceeding 60%.

The year-on-year rate of change has reached levels not seen for at least a decade, and with rising input cost forcing more and more companies to pass on the cost to consumers, we are increasingly seeing the risk of the current inflation spike not being the transitory phenomenon being touted by major central banks. Once inflationary pressures take hold it becomes very difficult to reverse and the risk being a self-feeding loop that may end up driving commodity prices even higher over the coming months and quarters, hence the increased focus on a new super-cycle. 

Most of the commentators primarily focus on rising demand as the main reason behind the continued run up in commodity prices, but investment demand plays an equally important role. The current demand from investors can either go directly into specific commodities via the futures market or exchange-traded funds, or via products such as bank provided swaps or index funds that tracks one of many well known commodity indices.

Three of the best known are the Bloomberg Commodity index, which we often use given its broad exposure across the three sectors of energy, metals and agriculture, and the S&P GSCI as well as the DBIQ Optimum yield diversified commodity index.

The composition of the three is shown below and it helps to explain why energy and in particular crude oil benefit greatly from increased investment demand. For each dollar an investor puts into an index tracking ETF or swap note, somewhere between 30 and 60 cents is being invested into energy products from crude oil and fuel to natural gas. Drilling a bit deeper we find that between 15 and 30 cents of each dollar invested goes toward an exposure in Brent and WTI crude oil.

Brent and WTI crude oil trade higher for a third day with Brent getting tantalizing close to $70/b, a level it briefly breached two months ago before suffering a 15% correction. The market, already supported by investment demand has also increasingly been focusing on reopening’s in Europe and the U.S. offsetting concerns about weaker demand in parts of virus-hit Asia. Especially in India where analysts forecast a sizeable drop in fuel demand this month between 0.5 and 1 million barrels/day.

Yesterday the market received an additional boost after the American Petroleum Institute reported a steep drop in U.S. crude stocks as well as sizable drops in both gasoline and distillate (table below), thereby reinforcing bullish views on fuel demand in the world’s largest economy. As per usual I will publish the result of the report on my Twitter profile @ole_s_hansen once it has been published at 14:30 GMT.

Source: Bloomberg, EIA, API & Saxo Group

Comment from our technical analyst Kim Cramer Larsson:
Since late March Brent crude oil has traded in a narrow four dollar rising channel, currently between $66 and $70. RSI is bullish with no divergence which indicates a likely test higher towards the next level of interest at $71.30/40, the March top and trendline connecting the previous three peaks. A break above could see the contract target the 2019 high at $75.60

Source: Saxo Group

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 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. This content is not intended to and does not change or expand on the execution-only service. 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)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, 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.