Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Fund selling exacerbates softening crude outlook
Ole Hansen
Head of Commodity Strategy
Key points
- Crude oil trades near a two-month low as hedge funds selling adds to a softer outlook
- The geopolitical risk premium deflates as the risk of a disruption remains very limited
- Timespreads, inventory levels and lower refinery margins all point to softer fundamentals
Crude oil, in a downtrend since early April, trades near a two-month low with Brent retracing half the USD 20 rally that started back in December when Houthi attacks on ships in the Red Sea, and the war between Israel and Hamas help lift the geopolitical temperature, and with that concerns the conflict would spread and eventually cause disruption to supplies from key producers in the Middle East. However, while the war is ongoing the risk of a disruption is increasingly being put to near zero, not least helped by ongoing international efforts – however difficult - to find a path towards a ceasefire.
The slump is currently being exacerbated by selling from wrong-footed hedge funds exiting long positions that were entered during the strong momentum-driven, and fresh technical selling from traders looking for a downward extension following last week’s breakdown and subsequent drop below the 200-day moving average, currently at USD 84.42 per barrel.
The failure to hold onto the USD 90 handle, which is expected to be the preferred price area for most OPEC+ producers, and faced with a loosening fundamentals as seen below, the prospect for a prolonged period of production curbs further eroding market shares are becoming a reality. At this point, however, 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
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 the mention fall in timespreads, 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
Later today, EIA will publish their weekly crude and fuel stock report, and recent releases have added to the downside pressure with rising US stockpiles compounding the weaker outlook. In addition, implied gasoline demand from US motorists has also been showing some weakness ahead of the peak summer driving season. Today’s oil market weakness was given an additional boost after the American Petroleum Institute reported an across the board rise in crude oil and fuel stock. The report will be released at 1430 GMT and as per usual I will post the result on X at @ole_s_hansen
Recent commodity articles:
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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
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19 April 2024: Commodity weekly focus on copper, gold, crude and diesel
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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
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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
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