Crude slumps amid technical selling and recession fears

Crude slumps amid technical selling and recession fears

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Key points

  • Yesterday Brent dipped below USD 70 for the first time in over two years, while WTI reached a December 2021 low
  • Led by a surge in speculative short positions amid sluggish demand and strong non-OPEC+ production
  • Some investors have entered the sell side in order to protect other investments from the rising risk of a recession
  • A record low belief in higher prices could be crude's best hope for staging a recovery

 


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.

Source: Saxo

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.

Source: Bloomberg

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

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    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...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.