Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Crude oil struggles near two-month low
Ole Hansen
Head of Commodity Strategy
Key points
- Crude oil remains rangebound near a two-month low, with Brent facing technical resistance above USD 84 and market weakness seen in falling spot premiums and weaker US refinery margins.
- Despite trading up by around 12% year-to-date, crude prices are pressured by loosening fundamentals, with OPEC+ likely extending production cuts at their June meeting to support prices.
- Hedge funds have been net sellers of WTI and Brent crude since mid-April, reducing their net long positions by 40%, contributing to weaker market fundamentals and lower prompt spreads.
Crude oil continues to trade rangebound near a two-month low with prices being kept relatively low amid technical resistance above USD 84 in Brent and weakness in several market measures – such as falling premiums for spot Brent over futures, and weaker US refinery margins – pointing to a soft patch in the current demand outlook. Crude prices nevertheless trade up by around 12% year-to-date, supported by another year of expected robust demand growth and OPEC+ production restraint being only partly offset by strong non-OPEC supply.
The failure to hold onto the USD 90 handle, the preferred price area for most OPEC+ producers, and faced with loosening fundamentals, an extension of current production cuts at the upcoming OPEC+ June meeting will be the most likely outcome, however, with a price-supportive seasonal pickup in demand looming, we only see a limited risk of Saudi Arabia and friends being forced once again to defend their price line in the sand, somewhere below USD 75 per barrel Brent.
Brent crude, the global benchmark, currently trades sideways within a USD 81 to USD 84.50 channel with main upside resistance being provided by the 200-day moving average, currently at USD 84.30. A break below USD 81 may trigger a technical sell reaction from tactical traders seeing a break of a head and shoulder formation.
Hedge funds have been net sellers of WTI and Brent crude since mid-April, during which time the combined net long has slumped by 40% to 314k contracts (314 million barrels), a halving of the length that was added during a four-month period from last December when Houthi attacks on ships in the Red Sea and geopolitical tensions helped support the run-up in prices to above USD 90 in Brent and USD 85 in WTI. Since then, the selling from hedge funds, often positioned in the front-month contracts of WTI and Brent where liquidity is the greatest, has helped push prompt spreads sharply lower, thereby supporting the weakening fundamentals narrative.
While speculative selling has helped create a weakening narrative, there is no doubt that key oil market indicators have been turning softer in recent weeks. We are seeing that in a continued fall in futures spreads, which act as a gauge of market strength/weakness, and not least in refining margins which have all softened around the world, while inventories have risen.
Global demand growth this year is still expected to rise above the historical trend, and unless we see downgrades to those, amid an unexpected worsening of global growth expectations, we see Brent crude return to trade closer to USD 90 per barrel into the Northern Hemisphere summer months.
Later today, the EIA will publish their weekly crude and fuel stock report with surveys pointing to a drop in both crude and gasoline stocks. However, some additional price weakness emerged overnight after the American Petroleum Institute in their weekly update saw crude and gasoline stocks both rise by more than 2 million barrels. Besides the changes in stock level, the EIA will as per usual also offer detailed insights into other key measures such as crude production and exports, refinery activity as well as implied demand from gasoline and diesel. The report will be released at 14:30 GMT and as per usual I will post the result on X at @ole_s_hansen.
Recent commodity articles:
17 May 2024: Commodity weekly: Metals lead broad gains
16 May 2024: Gold and silver rally as soft US data fuels market optimism
15 May 2024: Copper soars to record high, platinum breaks out
14 May 2024: COT: Crude long slump; grain purchases surge
8 May 2024: Fund selling exacerbates softening crude outlook
8 May 2024: Grains see bumpy start to 2024 crop year
6 May 2024: COT: Commodities correction spurs muted selling response
3 May 2024: Commodity weekly: Grains boost, correction in softs and energy
2 May 2024: Copper's momentum-fueled rally halts amid weakening fundamentals
29 April 2024: COT: Gold bulls stand firm despite recent correction
26 April 2024: Commodity weekly: Sticky inflation and adverse weather focus
23 April 2024: What drives the gold and silver correction ?
22 April 2024: COT: Declining momentum may signal shift toward consolidation
19 April 2024: Commodity weekly focus on copper, gold, crude and diesel
17 April 2024: Copper rally extends to near two year high
16 April 2024: Crude oil's risk premium ebbs and flows
15 April 2024:COT: Hedge funds propel multiple commodities positions beyond one-year highs
12 April 2024: Gold and silver surge at odds with other market developments
10 April 2024: Record breaking gold highlights silver and platinum's potential
8 April 2024:COT: Speculative interest in metals and energy gain momentum
5 April 2024: Commodity market sees broad gains, enjoying best week in nine months
4 April 2024: What's next as gold reaches USD 2,300
3 April 2024: Q2 Outlook: Is the correction over?
3 April 2024: Cocoa: A 50% farmgate price boost a step in the right direction
2 Apr 2024:COT: Gold and crude longs maintained amid strong underlying support
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