Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Commodity Strategy
Key points
The energy sector led by natural gas is heading for its biggest monthly decline since May 2023
China demand worries, speculative selling and stock market weakness seen as key drivers
Brent back above USD 80 potentially setting the stage for a rebound
Focus on FOMC and OPEC+ meetings as well as EIA's weekly crude and fuel stock report
The energy sector is heading for its biggest monthly loss since May 2023, with headlines this past month being dominated by the poor outlook for Chinese demand as economic weakness persists in the world’s top importer of crude oil. In addition, the recent loss of risk appetite across key stock market sectors has also led to some long liquidation from momentum-focused hedge funds. Today, however, Brent crude trades back above USD 80 in response to renewed worries about stability in the Middle East, after Hamas said Israel had killed its political leader, who was on a visit to Iran. Together with rumblings between Israel and Hezbollah in Lebanon, the market is once again forced to focus on the unlikely risk of the month-long conflict spilling over to other parts of the Middle East.
Overall, however, both WTI and Brent crude remain stuck, having traded sideways for the past two years within some well-established and still wide ranges, which in the case of Brent is currently between USD 75 and USD 95 (blue lines) and within that range a narrowing one between USD 78 and USD 87 (red lines). It has been argued throughout the latest stage of the recent correction that the move had more to do with long liquidation from hedge funds and technical selling from others, than an actual deterioration in the fundamental outlook, and we tend to agree with this observation, potentially setting the stage for a rebound in the coming weeks.
From a relatively weak start to the year amid concerns about Chinese demand and the negative impact of high funding costs following the most aggressive rate hiking campaign by the US Federal Reserve in decades, the crude oil market has since moved higher with most of the major movements being driven by the ebb and flow of a geopolitical risk premium, and with that the buying and selling from hedge funds looking for momentum. Something they have struggled to find during the past year, and which is reflected through data which recently showed the net long in Brent and WTI briefly falling below 200,000 contracts or 200 million barrels, to a level only seen twice during the past decade. The subsequent bounce has in part been supported by traders re-establishing long positions while closing loss-making short positions.
Recent commodity articles:
30 July 2024: Record demand explains gold's current resilience
29 July 2024: COT: Energy and metals selling cuts hedge fund long to four-month low
4 July 2024: Sluggish US economic indicators boost demand for gold and silver
4 July 2024: Podcast Special: Quarterly Outlook - Sandcastle Economics
2 July 2024: Quarterly Outlook - Energy and grains in focus as metals pause
1 July 2024: COT: Crude long builds ahead of Q3 while grains selling accelerates
28 June 2024: Metals and natural gas propel commodity sector to quarterly gain
26 June 2024: Crude seeks support from seasonal demand strength
24 June 2024: Copper's resilience despite China weakness
18 June 2024: Precious metals go through prolonger period of consolidation
17 June 2024: COT: Dollar long jumps; Funds start rebuilding crude long
14 June 2024: Commodity weekly: Energy sector gains counterbalance metal consolidation
13 June 2024: Oil prices steady amid divergent OPEC and IEA demand projections
10 June 2024: COT: Brent long cut to ten-year low; metals left exposed to end of week slump
3 June 2024: COT: Crude length added before OPEC+ meeting; gold and copper see profit-taking
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