WCU: Oil market rattled by Aramco attack  WCU: Oil market rattled by Aramco attack  WCU: Oil market rattled by Aramco attack

WCU: Oil market rattled by Aramco attack

Ole Hansen

Head of Commodity Strategy

Summary:  Despite another growth warning from OECD, the Bloomberg Commodity Index - which tracks a basket of major commodities in energy, metals and agriculture - traded higher for the first time in four weeks. This as geopolitical concerns lifted crude oil and gold thereby offsetting losses among industrial metals and some agricultural futures


A dramatic week in crude oil saw the Brent futures contract jump the most on record before deflating on continued growth and demand concerns. Gold traded higher but within the tightest range in two months, despite heightened geo-political risks, the second US rate cut in this cycle and a softer dollar. Low level trade talks between US and China received attention, with the market quietly hoping for a breakthrough when senior-level negotiations continue in earnest next month.

The year-long trade war was mentioned by the OECD as its main reason for once again lowering the outlook for global growth in 2019 and 2020. It said that global growth momentum had tumbled toward lows last seen during the financial crisis, with protectionist policies taking an increased toll on confidence and investments. Industrial metals traded down but off their lows after China, the world’s biggest metal consumer, lowered borrowing costs in a bid to ease liquidity concerns.

Despite the warning from OECD, the Bloomberg Commodity Index - which tracks a basket of major commodities in energy, metals and agriculture - traded higher for the first time in four weeks. This as geopolitical concerns lifted crude oil and gold thereby offsetting the mentioned losses among industrial metals and some agricultural futures. Cocoa continued its September rally on indications of lower supply from the Ivory Coast and Ghana. The outbreak of the deadly swollen-shoot disease in Ghana has cut its production and the market worry is that it may spread to the Ivory Coast.

Source: Bloomberg, Saxo Bank

While probably only temporary, the crude oil pendulum swung dramatically back in favor of higher prices this week when attacks on the world’s biggest oil processing plant in Khurais and Abqaiq in Saudi Arabia temporarily knocked out 5% of world supply. For a couple of days, the uncertainty resulted in major price swings before Saudi officials calmed the markets after saying that supplies would be restored sooner than the market had feared.

Following a week where oil market reports warned about the risk of emerging supply gluts due to weak demand growth the spike was painful but could have been a lot worse considering the amount of oil being impacted.

Rising oil prices alongside an economic slowdown leading to lower demand growth is not a good combination. This is probably the main reason why the crude oil rally deflated so quickly. The risk to supply from a geo-political escalation and Saudi Arabia’s apparent weakness when it comes to protecting its assets should keep the prices supported during the coming weeks. The risk of a supply shortfall has been ruled out with Saudi Arabia tapping into its domestic stockpile stocks of 180 million barrels (Source: JODI) to meet any production short fall.

However, the geo-political risk premium, judged to be anything above $60/b on Brent, is likely to take longer to disappear. Iran, which has been accused of being behind the attacks, may increasingly find itself trapped in a corner with the pressure of rising sanctions making it increasingly impossible to sell its oil.

On that basis we suspect that Brent crude oil's range around $60/b seen these past three months now has shifted higher towards $65/b.

Source: Saxo Bank

Gold managed to stay within the tightest trading range in eight weeks. While the Saudi Aramco attack triggered a strong opening to the week, it was the aftermath of the US rate cut that created a 28-dollar high to low move. Traders bought the rate cut announcement only to quickly dump their positions when it became apparent that this was a hawkish rate cut given the reluctancy by members of the FOMC so commit to a succession of rate cuts.

Overall the key takeaway from the week is that the $1485/oz support level remains firm and that the upside is currently capped just above $1510/oz. Having been in a correction mode now for the past month it still feels like investors are more concerned above missing a potential upside price extension than a further correction of a few percentage points.

While the FOMC was reluctant to commit to renewed quantitative easing, we feel it’s not a question of if but when Fed Chair Powell is forced to deliver a substantial policy easing. The short-term lending mechanism has come under some considerable pressure this past week with the Federal Reserve forced to intervene with liquidity injections for the first time in a decade.

Gold’s June to August rally was driven by the collapse in global bond yields. Since then, the 10-year yield has bounced from a low of 1.43% to the current 1.78%. While that support has faded, we are now seeing geo-political risks on the rise while the dollar is showing signs of potentially topping out.

We maintain a positive outlook for gold in the belief that the low point in global economic growth remains in front, not behind us. The US Federal Reserve is likely to continue to cut rates, while the US-China trade war is raising recessionary risks. Nominal and real bond yields are expected to stay low and, in some places, negative thereby removing the opportunity cost associated with holding a non-coupon and non-interest paying asset.

Continued buying by central banks may also be expected with central banks looking to diversify and for some to reduce the dependency on the dollar, so called de-dollarization. And finally, as mentioned, the dollar is potentially on its final legs with the emerging risk of US action to weaken the Greenback. 

However, in the short-term speculation that a U.S.-China trade deal can be reached next month may keep the upside capped while keeping the risk of a deeper correction open. A break below the mentioned $1485/oz support level could trigger a deeper correction towards $1450/oz.

Source: Saxo Bank

Disclaimer

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 Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

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 Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.