Commodity weekly: Crude overshoots; silver the comeback kid

Financial markets responded to these developments by sending US long-end Treasury yields sharply lower. The dollar suffered a broad retreat against its major peers, while global equity markets rose, especially those beaten down sectors that have struggled recently amid elevated levels of debt and an increasing cost of servicing that debt. Examples of themes benefiting were energy storage and renewable energy, two areas that support demand for metals such as beaten down and under owned silver and platinum.

Crude oil slump draws fresh attention to November 26 OPEC meeting

Broad losses across the energy sector saw the Bloomberg Energy Subindex trade down more than 2% on the week, thereby extending a four-week 10% tumble to the lowest level since July. While the latest triggers were rising US inventories and continued demand worries, the drivers were accelerated technical selling from traders being increasingly forced to reduce longs while adding fresh short positions amid a deteriorating technical outlook.

The crude oil slump to a July low accelerated after prices failed to reach safer grounds last Tuesday when a broad risk-on rally was triggered after a weaker than expected US CPI print raised the prospect for peak rates and lower funding costs. The failure to break higher gave technical-focused short sellers the confidence to mark prices lower, culminating in Thursday’s 5% slump which took the Brent and WTI into technical bear market territory, having fallen by more than 20% from the early October peaks.

According to the futures market, the short-term demand outlook is showing signs of weakening. This is most notable in WTI where the spread between the prompt delivery month and three months later has returned to a $0.4/bbl contango for the first time since July. The spread reached a $6.2/bbl backwardation back in late September when tight supply focus peaked following Saudi and Russian production cuts. The equivalent three-month spread in Brent is also toying with contango, having collapsed from around $5.7/bbl to the current $0.05/bbl.

All these developments have seen third quarter strength deflate rapidly with production cuts from Russia and not least Saudi Arabia having a limited impact on the market. From late June to late September, Brent crude oil rallied by around one-third in response to Saudi production cuts amid a quest for higher prices and OPEC estimates of a 3 million barrel a day supply deficit. However, since then, the demand outlook has weakened, thereby forcing a strong sell reaction from speculators who got caught with a big long and the smallest gross short position in 12 years. The level of speculative short positions held into a weakening market helps dictate the size of a sell off as short positions are needed to absorb selling pressure from longs trying to get out.

As we highlighted in our latest commodity weekly, we worried that the crude oil market was at risk overshooting to the downside and with Brent below $80 and WTI below $75, we believe that stage has now been reached, with Thursday’s sell-off looking like a capitulation move, potentially signalling a bottom. The latest weakness came after the EIA, in its latest update covering two weeks’ worth of data, reported a 17.5 million barrel increase in nationwide stockpiles. However, what went somewhat unnoticed was an almost identical drop in total inventories of gasoline, distillates, and jet fuel of 16.4 million barrels. Apart from implied gasoline demand rising to a supportive 9 mb/d, the highest level for this time of year since 2021, some price support may also begin to emerge as refineries come out of maintenance, thereby raising demand for crude oil.

In WTI, a return above $75 may send the first signal of consolidation while a break back above $80, and Brent above $83.50, will be required before talking about a fresh through. However, with the latest slump being driven by technical developments more than fundamentals, a potential low is in our opinion within reach with traders also having to consider the risk of a geopolitical flareup and additional action to support prices from OPEC and non-OPEC when they meet on November 26.