Head of Commodity Strategy
Summary: Crude oil prices continue lower after tumbling 5% on Tuesday amid fresh technical momentum selling following Monday’s failed attempt to reach safer grounds above $80.50 in Brent and $76.50 in WTI. In the process prices have slumped back to levels last seen during the March banking crisis. Despite OPEC’s best efforts to confront emerging signs of a slower than expected demand outlook for the second half, and to ensure a stable high price for its crude oil, negative price developments since April 2 production cut has rendered these efforts fruitless with short sellers firmly back in control
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Global Market Quick Take: Europe
Crude oil prices continue lower after tumbling 5% on Tuesday amid fresh technical momentum selling following Monday’s failed attempt to reach safer grounds above $80.50 in Brent and $76.50 in WTI. In the process prices have slumped back to levels last seen during the March banking crisis which helped trigger the OPEC+ production cut on April 2. However, following a brief spike in response to the cut, the market has since then been on the defensive with technical and macro-economic developments once again favouring those holding short positions.
Despite OPEC’s best efforts to confront emerging signs of a slower than expected demand outlook for the second half, and to ensure a stable high price for its crude oil, negative price developments since April 2 has rendered these efforts fruitless. Not only has Russia’s ability to export its crude and fuel products exceeded most expectations, in addition we are seeing a less commodity intensive recovery in China than during earlier government supported growth sprint. Combining these developments with continued weakness in economic data, especially in the US, and the ongoing crisis among US regional banks, the demand outlook for the second half continues to be downgraded, thereby forcing price downgrades, most recently from Morgan Stanley who have cut their end of year Brent crude oil price by 12.5 dollars to $75 a barrel.
For now, the market will continue to worry about the risk of recession and its impact on demand, a concern that during the past month has been on clear display through a dramatic slump in refinery margins across the major regions, first for diesel and more recently also for gasoline. Diesel which powers heavy machinery such as truck and construction equipment are often seen as the canary in the coalmine and if continued it may lead to lower refinery demand and with that lower demand for crude oil.
Ahead of tonight’s FOMC meeting, previewed in our daily Market Quick Take and discussed in our daily Saxo Market Call podcast, the weekly crude oil and fuel stock report from the EIA is unlikely to attract much attention. The American Petroleum Institute last night reported a 3.9 million barrel draw in US crude stocks, and 1 million barrels in distillates while gasoline stocks increased by 0.4m barrel. Apart from these data the EIA will as per usual also shed some light on production, exports as well as the implied demand for gasoline and diesel.
The April 2 OPEC+ production cut continued to reverberate across the crude oil market, in the most recent reporting week to April 25 through the negative impact of short sellers chasing the gaps and longs that was bought after April 3 being reduced. The combined net long in WTI and Brent crude oil was cut by 54.3k lots to 400k, a four-week low, with reduction being driven by 32.5k lots of long liquidation and 21.8k lots of fresh shorts.
A major driver of the recent crude oil market weakness has been a slump in refinery margins across the major refinery hubs in Asia, the US as well as Europe. Especially the diesel market saw accelerated selling during the reporting week, resulting in the ICE gasoil net flipping to a small net short for only the third time in seven years. Stateside meanwhile, the net long in the ULSD contract (Ultra-Light Sulphur Diesel), previously known as heating oil, was cut by 44% to a 27-month low.
Having broken below $71.53, the 61.8% retracement of the March to April rally, the short-term risk of an extension to the sub-65 low cannot be ruled out.
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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.
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