Summary: Raised hopes of a US-China trade deal driving stocks higher, a softer dollar and output cuts have supported oil following its December collapse, but worries about the global economy still nag.
Brent crude oil has returned to $60/barrel while WTI has moved back above $50/b as hopes of a deal between the US and China on trade continues to build. Yesterday, US President Trump tweeted: “Talks with China are going very well” and that was followed by news of an unplanned extension of the talks into Wednesday. These developments have supported a continued recovery in global stocks following a miserable December. Adding to this are a softer dollar and ongoing production cuts from the Opec+ group, which have all supported the current change in sentiment.
After finding support at $50/b last month Brent crude has swiftly returned to the November-to-December consolidation area between $57.50/b and $64/b:
A trade deal between the US and China, however, is likely to slow but unlikely to reverse the deterioration seen recently in forward-looking economic data from the US to Europe and China. On that basis the upside at this stage may be limited to the upper area of the mentioned consolidation area for Brent at $64/b and WTI at $55/b.
Another reason why the bulls may need to be patient can be seen in the developments of the forward curve and the open interest in the two major oil contracts of WTI and Brent. A rally driven by fundamentals, such as the outlook for a tightening, would normally trigger a flattening of the forward curve, as the contango – the prompt months discount to deferred – begins to narrow.
As per the chart below we find that the six months spread between February (CLG9) and August (CLQ9) has hardly moved since December. Hedge funds would normally during a rally cut short positions while adding fresh longs. However, since the December 24 low the open interest in WTI has only risen by 61k lots while in Brent it has only risen by 36k lots. This could indicate that the rally has been short covering more than fresh longs entering the market.
Please note that due to the US government shutdown the CFTC has not issued any Commitments of Traders reports since the week of December 18. The COT report provides an important weekly insight into the size and direction of positions held by hedge funds across key futures markets from currencies to bonds and not least commodities.