Head of Commodity Strategy
Summary: Crude oil’s recent recovery has been gathering some added momentum this week, first on signs Saudi production and Russian export cuts have started to tighten the market. The market then received another boost on Wednesday after lower-than-expected US inflation raised optimism the US rate-hike cycle may be nearing an end. Having broken resistance-now-support at $78.50 the short-term technical outlook for Brent has improved, and it could take it towards the 200-day moving average and resistance around $82.50-83.00
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Global Market Quick Take: Europe
Crude oil’s recent recovery has been gathering some added momentum this week, first on signs Saudi production and Russian export cuts have started to tighten the market. The market then received another boost on Wednesday after lower-than-expected US inflation raised optimism the US rate-hike cycle may be nearing an end, thereby reducing the risk to demand from a potential recession. In addition, China’s import of crude oil reached the second highest level on record last month, a sign of strategic stock building and robust demand from refiners as they used their government distributed quotas. While it may somewhat disguise some weakness in domestic demand, it nevertheless removes barrels from the market, thereby supporting a move to a tighter market.
Brent crude trades back above $80 and WTI above $75, both for the first time since early May, and the positive momentum it has created is currently providing support with funds being forced to reduce bearish oil bets originally entered into as a hedge against an economic slowdown. The combined net long in Brent and WTI held by managed money accounts in the latest reporting week to July 3 was 280k contracts and near the lowest belief in higher prices in more than ten years.
In Saxo’s recently published Q3-23 Outlook titled “AI, The good, the bad, and the bubble” I wrote the following about the outlook for crude oil:
WTI and Brent crude oil’s sideway trading action since May looks set to continue into the third quarter with global economic growth concerns continuing to be offset by the willingness of key OPEC+ members to sacrifice revenues and market share to support the price. Overall, we believe prices are near a cycle low, but a few more challenging months cannot be ruled out, primarily because of worries that a robust pickup in demand, as forecast by OPEC and the IEA, will fail to materialise. The latter is potentially the reason why Saudi Arabia took the unprecedented step of announcing a unilateral production cut shortly after the group announced production cutbacks.
It all adds up to what could become a challenging few months for OPEC, especially if demand should fail to recover with Saudi Arabia, then raising the pressure on other producers to curb production. For now, the de facto leader of OPEC has managed to send a signal of support which may help prevent a deeper correction, while an eventual recovery, which we believe will occur, paves the way for higher prices.
Until then, Brent will likely remain stuck in the $70’s before, towards the end of the quarter, eventually breaking back above to the psychologically important $80 level, thereby shifting the current 70-80 range higher by 5-10 dollars, where it will be trading ahead of year-end.
Production cuts and the general improved risk sentiment seems to have brought forward a return to the $80’s in Brent, and depending on incoming economic data we may see an attempt to move higher, potentially towards the upper end of the mentioned range that has prevailed since the beginning of the year.
Monthly oil market reports from the EIA, IEA and OPEC still point to a solid non-OECD driven recovery in global demand during the second half, and together with the mentioned production cuts, a price supportive market tightness looks increasingly likely in the coming months. However, with OPEC spare capacity from key Middle East producers running above six million barrels per day, we do not see the risk of a runaway rally, as producers are anxious to optimize revenues and production in the coming years before the energy transition eventually lowers global demand. Also, the current fragility of the global economy -on clear display in the latest trade date from China which showed overall exports slumping 12.4% YoY to a three-year low, may also limit crude oil’s advance.
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