Crude oil remains stuck ahead of key risk events

Ole Hansen

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: 

 
Enlarge

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.

Enlarge

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. 

Enlarge

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. 

Enlarge

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.

Enlarge
Source: Saxo Bank

You can access both of our platforms from a single Saxo account.

Disclaimer

The Saxo Bank 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 Rules of Engagement and (v) Notices applying to 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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/legal/disclaimer/saxo-disclaimer)