Summary: Oil is exiting October with its largest monthly decline since July 16, but the US sanctions on Iran still have the potential to provide support.
The beginning of October saw increased speculation that Brent crude oil could hit $85 or potentially even $100/barrel before year-end. Now, however, the commodity is set to close October with its largest monthly decline since July 2016.
The initial, bullish projections came in response to the expectations that the November 4 re-introduction of US sanctions against the Iranian oil industry would led to a tight market, with other producers struggling to meet the shortfall. Before reaching November 4, however, and despite data already showing a sharp drop in exports, crude oil instead made a sharp U-turn and dropped by close to $12/b before finding support at $75/b – a key technical level and the middle of the range around which Brent traded between April and September.
Source: Saxo Bank
These developments once again demonstrated why it is close to impossible to make short-term oil price forecasts at this point. The market is constantly exposed to oft-diverging shifts between oil fundamentals, political interference, and macro investors using oil as a proxy for global economic trends.
The risk of a major reversal became clear in early October when Brent crude oil broke above $80/b and surged to almost $87/b. During this rally, hedge funds turned sellers (and especially of WTI crude oil) instead of buying into the strength as they normally do. As the price of oil rose, so did the verbal intervention from Washington with President Trump putting pressure on Saudi Arabia to pump harder. Also rising, however, was the risk to the outlook for demand with many emerging market economies already being troubled by heavy dollar debt at a time of rising funding costs and a stronger dollar.
Hedge funds have, despite the early October surge to $87/b, nevertheless been cutting their combined bullish oil bet by one-third to a 15-month low.
A pledge from Saudi Arabia to pump as hard as possible together with increased focus on the negative impact on future demand growth helped trigger the turnaround. Demand growth worries continue to receive increased attention with the cocktail of trade wars, strong dollar, rising debt, and rising funding costs all providing a challenging outlook for global growth, and with that demand for crude oil.
This is particularly significant considering that close to three-quarter of global demand growth originates from EM economies that are particular exposed to the above mentioned cocktail.
However, the increased uncertainty about demand growth into 2019 has yet to show up in the monthly reports from the three major forecasters of Opec, the US Energy Information Administration, and the International Energy Agency. Between July and October, these three lowered their global oil demand growth projections by an average of 100,000 barrels/day to 1.42 million b/d.
A monthly survey of 46 economists and analysts carried out by Reuters (Saxo Bank contributed to the survey) this past week meanwhile projected that global oil demand would grow by between 1.1 and 1.5 million b/d in 2019.
Having returned to $75/b it is no surprise that the call for $95 has been changed to one looking for $65/b. However, we believe that the introduction of US sanctions against Iran could trigger a renewed focus on supply and help support the price during the coming weeks and months until the actual impact becomes clearer. We believe that upside potential at this stage should be capped around $80/b due to rising US inventories caused by the seasonal slowdown in refinery demand (until the end of November), together with increased production from the US, Russia, and Saudi Arabia.
Later today the EIA will release its monthly Crude Oil and Natural Gas Production report for August and a rise above 11 million b/d is expected. This after Russia yesterday said that its September production reached a new post-Soviet high of 11.356 million b/d. In other words, it is only a matter of time before the US overtakes Russia as the world’s biggest producer.
But first the “Weekly Petroleum Status Report” at 14:30 GMT, one hour earlier than normal with the US yet to put their clocks back. Surveys are pointing to another weekly rise in crude stocks while product stocks are expected to decline. Both of these are normal developments for this time of year as per the charts below and should last until end-November or early December.
As usual, the crude oil stocks change will depend on the net level of imports. The four-week average stood at 5.6 million barrels/day last week, a year-on-year decline of 4.5%, The rapid improvement in the stock levels at Cushing, the Oklahoma delivery point for WTI crude oil futures, has helped keep its discount to Brent close to $10/b. API yesterday reported an increase of 1.4 million barrels, not far from the previous week.
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Equities: The AI fever pushes market to new extremes
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
China faces challenges from generative AI amidst the fragmentation game
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Japan’s riposte to aging and productivity headwinds: robots with generative AI
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Artificial Intelligence: a promising gamechanger for the portfolio?
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Fixed income: To hike or not to hike, that is the question
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
The Saxo 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 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 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 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 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 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.
None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.
X
Your browser cannot display this website correctly.
Our website is optimised to be browsed by a system running iOS 9.X and on desktop IE 10 or newer. If you are using an older system or browser, the website may look strange. To improve your experience on our site, please update your browser or system.