Head of Commodity Strategy
Summary: Crude oil has settled into a relatively tight range above $80/barrel, with forecasts weighing short-term upside risks against the potential of slowing demand growth and rising non-Opec production.
Crude oil has settled into a relatively tight, $2/barrel range above $80/b. The break above this level last month helped trigger a rapid extension to almost $87/b on growing speculation that US sanctions against Iran could hit harder than previously expected. The risk of a return to $100/b received a lot of media attention, not least following bullish comments from two of the world’s biggest physical oil traders.
Since then, however, crude oil has returned to $80/b after a jump in US bond yields and the move lower in stocks; both highlighted the risk to global growth from rising yields, rising debt levels and the strong dollar.
In addition, we have seen unusual behaviour from hedge funds who, instead of buying into the strength as they normally do, turned net sellers. During the two-week period up until October 9, the combined net-long in Brent and WTI was cut by 71,000 lots to 757,000 lots, some 30% below the March record.
The fact that funds have been selling into the recent strength highlights involvement from macro-oriented funds who look beyond the current upside risk to prices and instead towards the increased risk of slowing demand growth and rising non-Opec production. In the very short term, the market positioning highlights the risk of a deeper correction below $80/b. However, given the not-yet-known impact on Iran’s ability to produce and export, we would see such an event as a buying opportunity.
The risks to prices from lower demand growth, trade wars, and rising non-Opec production are unlikely to impact the market until next year.
Later today at 14:30 GMT, the US Energy Information Administration will release its Weekly Petroleum Status Report. Oil received a small boost last night after the American Petroleum Institute said that crude stocks dropped by 2.1 million barrels last week instead of rising by 2.5m as per the most recent forecast. Crude stocks at Cushing, meanwhile, look set to rise for a fourth consecutive week as stock levels continue to recover after hitting a four-year low back in August.
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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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
