Head of Commodity Strategy
Key points
Crude oil’s decline continued on Tuesday before staging a modest rebound, as speculative selling exacerbated concerns over weak demand. Brent dipped below USD 70 for the first time in over two years, while WTI reached a December 2021 low, nearing USD 65 per barrel. Earlier in the week, global commodity traders Gunvor and Trafigura suggested that Brent prices could fall back into the USD 60s, citing sluggish demand from China and persistent global oversupply.
Last week’s OPEC+ decision to delay a planned October production increase by two months, combined with weak global manufacturing data and a technical market breakdown, contributed to a surge in speculative short positions amid soft demand and strong non-OPEC+ production. OPEC’s struggle to forecast global demand was evident in their latest Monthly Oil Market Report, where they maintained a 2024 demand growth projection of over 2 million barrels per day—more than double the EIA’s forecast in its Short-term Energy Outlook. The IEA, which in July projected demand growth at around 0.97 million barrels per day, is set to release its updated Oil Market Report on Thursday.
For now, crude’s ability to stage a rebound will depend on several factors, not least next week’s FOMC meeting and the dollar’s response to an expected rate cut. From a technical perspective, a major round of short-covering is unlikely to materialise unless Brent breaks back above USD 75 and WTI above USD 71.50.
As the above chart highlight, the recent move is not that significant from a recent historic perspective, but having seen the market trade sideways for the more than two years, the risk of a downside extension has forced a great deal of repositioning by traders and investors, some entering the sell side in order to protect other investments from the rising risk of a recession. A substantial flattening of calendar spreads during the past month are consistent with market behaviours ahead of an incoming recession which normally leads to a strong inventory build-up. The canary in the coalmine has been the recent drop in refinery margins amid rising inventories and soft demand for refined fuel products, especially diesel.
In the latest reporting week to September 3 - the day Brent crude slumped below USD 75 and two days before OPEC+ scrapped plans to increase production from October - large speculators held a record bearish position in the four WTI and Brent futures contracts traded on the exchanges in New York and London. The 139,000 contract net long was the lowest recorded belief in higher prices since 2011 when the ICE Exchange Europe joined the US CFTC in collecting weekly positioning data. In the last three weeks alone the net long was cut by 43% on a combination of 41k contract long liquidation and 62k contracts of new short positions.
The negative sentiment extended to refined fuels, with extremely bearish positions seen across gasoline and especially NY ULSD and London gas oil, two diesel and middle distillate contracts. Overall, these extremes not only highlight the negative technical picture supporting buy-into-strength strategies, but also traders using energy as a hedge against recession, amid signs of downturn in manufacturing across the U.S., Europe and recently not least China.
As we highlighted on several occasions, hedge funds tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals and supported by technical price developments. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short or weakest long position ahead of a through in the market.
Recent commodity articles:
10 Sept 2024: US Election: will gold win in all scenarios
9 Sept 2024: COT: Crude long cut to 12-year low; Dollar short more than doubling
5 Sept 2024: Can gold overcome the 'September curse'?
4 Sept 2024: Wheat rises on European crop worries
3 Sept 2024: Chinese economic woes drag down crude oil and copper
2 Sept 2024: COT: Commodities see broad demand as the USD slumps to a net short
30 Aug 2024: Commodities sector eyes fourth weekly gain amid softer dollar and Fed expectations
27 Aug 2024: Month-long sugar slide pauses amid concerns of Brazil's supply
27 Aug 2024: Libya supply disruptions propel crude prices higher
26 Aug 2024: COT: Funds boost metals investment as dollar long positions halve amid weakness
23 Aug 2024: Commodities Weekly: Metal strength counterbalancing energy and grains
22 Aug 2024: Persistent supply contraints keep cocoa prices elevated
21 Aug 2024: Weak demand focus steers crude towards key support
19 Aug 2024: Resilient gold bulls drive price to fresh record above USD 2500
19 Aug 2024: COT Buyers return to crude as gold stays strong; Historic yen buying
16 Aug 2024: Commodities weekly: Gold strong as China weakness drags on other markets
9 Aug 2024: Commodities weekly: Calm returns to markets, including raw materials
8 Aug 2024: Sentiment-driven crude sell-off eases, allowing traders to focus on supply risks
7 Aug 2024: Limited short-selling interest observed during copper's recent aggressive correction
6 Aug 2024: Video: What factors are fueling the current market turmoil and gold's response
5 Aug 2024: COT: Broad commodities sell-off gains momentum; Forex traders seek JPY and CHF
5 Aug 2024: Commodities: Position reduction in focus as volatility spikes
2 Aug 2024: Widespread commodities decline in July, with gold as the notable exception
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy