Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
What to watch in crude oil as 2024 gets underway
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil traders have started the year on a cautionary note with global growth and demand worries offsetting rising geopolitical risks related to developments in and around the Red Sea. We see an increased likelihood of crude oil staying rangebound in the coming months with no single trigger being strong enough to change the dynamics of a market that has divided its focus between growth worries, not least in China and the USA, as well as rising non-OPEC+ production on one hand and OPEC+ cuts and geopolitical risks on the other
Key points
- Crude oil is likely to remain rangebound around $80 in Brent during the coming quarter
- Non-OPEC+ supply and demand concerns offset OPEC+ cuts, Mideast tensions
- The timing of the first and the subsequent pace of US rate cuts will add volatility
Crude oil traders have started the year on a cautionary note with global growth and demand worries offsetting rising geopolitical risks related to developments in and around the Red Sea where attacks on commercial ships last month forced shippers to reroute cargoes from the Middle East and Asia, thereby raising costs and journey times. It is also worth keeping in mind that the first few weeks of trading will likely, just like most other years, trigger some volatile trading as trigger happy speculators will be looking for trading signals, in the process creating choppy trading conditions.
We see an increased likelihood of crude oil staying rangebound in the coming months with no single trigger being strong enough to change the dynamics of a market that has divided its focus between growth worries, not least in China and the USA, as well as rising non-OPEC+ production on one hand and OPEC+ cuts and geopolitical risks on the other. On top of this we may see risk appetite ebb and flow in line with changes in the expected pace of US rate cuts. With that in mind, we see Brent crude oil remain rangebound around $80 per barrel during the first quarter with the biggest risk to the downside being a disunited OPEC+ leading to a collapse in the current agreement to keep production down, and the upside from a major geopolitical event disrupting the flow of crude oil and gas from the Middle East.
Brent spent last year trading in a relatively small 27.5-dollar range compared with the 64-dollar range seen in 2022 when the war in Ukraine drove the market sharply higher, before collapsing, and overall, the front month futures contract in Brent ended 6% lower on the year while WTI was 7% lower. From an investor's perspective both futures contracts traded in backwardation through most of the year and given the positive impact on rolling contracts in such an environment saw the negative result reduced to -1% in Brent and -2% in WTI.
For a more detailed look at the technical outlook please click here to read the latest from Kim Cramer, Saxo's technical analysis specialist.
At the current price near $80, Brent trades just a couple of bucks below last year’s average price and the current 200-day moving average just above $82, and while the relatively small range as mentioned can be credited to OPEC+ and its attempt to maintain stable prices through actively managing supply, there is no doubt that the group would have liked to see prices higher. But rising production from the US, Iran, Venezuela, Guyana and others, together with Q4 demand weakness, left the group with only with a half victory given the failure to boost prices while surrendering market share.
Being forced to surrender additional market share in order to keep prices supported above $70 remain a key risk to the unity of the group, not least given the prospect of weaker demand growth and continued robust production from non-OPEC+ nations putting downward pressure on OPEC+ market share and upward pressure on available spare capacity, not least from Saudi Arabia which holds more than 3 million barrels per day of spare capacity, a development that in normal times should help curb any price rally given the strong incentive to bring more oil back to the market.
Speculators such as hedge funds and CTAs will, just like last year, continue to play an important role when it comes to setting highs and lows in the market. These often momentum following trading strategies tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. However, 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 position ahead of a through in the market.
Last year’s rangebound trading behavior was a constant challenge for momentum following speculators, leading to several situations where they ended up holding the wrong position when Brent and WTI instead of continuing a trend, suddenly reversed as the technical outlook changed, driven among others by OPEC+ production decisions, US rate cut expectations, China developments and geopolitical events. From a 491-million-barrel net long in February to a 231-million-barrel low in June before reaching a two-year high in September at 560 million, only to collapse to an 11-year low at 171 million at the beginning of December, before Red Sea disruptions helped support a strong two-week rebound ahead of yearend.
Conclusion:
Crude oil is likely to remain rangebound around $80 in Brent during the coming quarter as non-OPEC+ supply and global growth concerns offset production cuts, Middle East tensions and another rise in global demand, albeit at a slower pace than last year. The OPEC+ group of producers will continue to support prices by extending and potentially deepening the current production cuts, in the process yielding market share while adding to the level of available spare capacity. The timing of the first and the subsequent pace of US rate cuts will add volatility to the market from macro-focused speculators.
Commodity articles:
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: Video - Investing in Uranium
1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
16 Nov 2023: Podcast: Silver comeback, watch OPEC as crude oil slides lower
16 Nov 2023: Crude oil weakness adds focus to upcoming OPEC meeting
15 Nov 2023: Soft CPI lifts gold and beaten down silver and platinum
12 Nov 2023: Copper supported by green transformation demand and peak rate speculation
10 Nov 2023: Commodity weekly: Crude oil risks overshooting the downside
Previous "Commitment of Traders" articles
18 Dec 2023: COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An underowned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand
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