Head of Commodity Strategy
Crude oil remains stuck in a relatively tight range in the run up to key meetings in Vienna later this month. The Opec meeting on June 22 will be followed by a joint meeting with non-Opec producers on June 23. Up for discussion is a potential reduction or revision to the 1.8 million b/d production cut deal, which since January 2017 has supported a 65% recovery in the price of Brent crude oil, the global benchmark.
Crude oil and products have traded in a relatively tight range since last week’s EIA stock report:
After reaching $80/b on Brent crude last month and after seeing Opec’s production continuing to slide, not least due to sustained declines in Venezuela, the call for action has grown louder. Not least from Saudi Arabia and Russia, both of which have expressed concern about the potential damage of rising oil prices to global growth and demand.
The inability of most of the 14 Opec members to increase production, especially Iran (US sanctions), Iraq (lack of investment) and Venezuela (economic collapse) has raised the temperature ahead of the meeting. Geopolitical tensions are likely to resurface with US sanctions on Venezuela and soon Iran too being seen as providing Saudi Arabia an unfair advantage as it would gain market share from a production increase.
The IEA in its latest Oil Market Report for June kept global demand growth unchanged while increasing non-Opec supply a notch. They did, however, warn that a lack of action in terms of increasing production could leave a supply gap due to the ongoing collapse in Venezuelan and soon also Iranian production. The IEA estimates that the total loss of supply from these two countries could reach 1.5m b/d by end-2019. Against this they see other Middle East producers, led by Saudi Arabia, being able to increase production by 1.1m b/d.
The June oil market reports from the EIA, Opec and the IEA have kept average demand growth unchanged while moving non-Opec supply up a notch.
Russia is said to be planning to propose a full roll back of the combined 1.8m b/d production cut from January 2017. With Venezuela, Angola and Mexico currently not able to increase production this proposal could over time result in a net 1 m b/d increase. For now the attention turns to Moscow where Saudi Arabia and Russia meet both on and off the football pitch Thursday when the 2018 World Cup kicks off.
Given the uncertainty surrounding the impact on oil from decisions being taken over the next couple of weeks it is no surprise to see the price being stuck in a relatively tight range. The wait-and-see approach combined with a view that $80/b may be as good as it gets at this stage saw hedge funds cut bullish bets for a seventh consecutive week last week. This, the longest losing streak since 2013, saw both long and short positions reduced with the net-long returning to 790,000 lots (790 million barrels), an eight-month low.
The EIA will publish its weekly petroleum status report later today at 14:30 GMT. Some price weakness emerged yesterday after the API surprisingly saw a second counter-seasonal rise in crude oil stocks.
WTI crude oil has settled into a relatively tight range after correcting 50% of its February to May rally. A bear flag formation on the chart has raised the risk of an extension on a break below $65.20/b.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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