Head of Commodity Strategy
Summary: The early January recovery across key commodities extended into a second week with the Bloomberg Commodity index rallying by more than 4% since touching a near three-year low on the first trading day of year.
After finding support at $50/barrel last month, Brent crude oil has swiftly returned to the November-to-December consolidation area between $57.50/b and $64/b. Just like all other assets it’s the hopes of a deal between the US and China on trade which could reduce worries about the strength of demand going forward. Adding to this, the weaker dollar and not least ongoing production cuts from the Opec+ group, which should further reduce supply over the coming months.
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 and it could lead to slowing upside momentum as we approach the upper area of the abovementioned consolidation zone for Brent at $64/b and WTI at $55/b.
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.
The ICE Futures Europe Exchange, however, continues as normal with Brent crude and gas oil data still being published. In the week to December 31 when Brent touched $50/b, hedge funds cut bullish Brent crude oil bets by 10,000 lots to 152,000 lots, a 70% reduction since October when the sell-off began.
Brent crude oil has returned to its November to December consolidation area. Next key resistance at $64/b being the 38.2% retracement of 42% sell-off since October.
