Head of Commodity Strategy
Crude oil’s steady ascent since December, when Houthi attacks on ships in the Red Sea raised the geopolitical temperature while supporting tighter supply conditions with millions of barrels of crude and fuel being stuck at sea for longer, is showing signs of running out of steam. Recently WTI made an unsuccessful attempt to break above USD 80 resistance while Brent’s upside move was arrested well ahead of key resistance at USD 85. While a recent buildup in hedge funds' long positioning and the current price behavior support an upside break, we stay skeptical given the lack of a clear catalyst to trigger such a move.
The impact of the crude markets' inability to break higher, or lower for that matter, can be seen in the narrowing trading ranges with the four-week rolling trading range in Brent and WTI both falling to a ten-year low with a range in WTI this past month of USD 5.3 and just USD 4.2 in Brent. While the geopolitical temperature has moved higher by a few degrees since December we have yet to experience any disruptions, and the market has concluded that such a risk is currently very low.
Without OPEC+ supporting prices through supply cutbacks – which on paper total roughly 2 million barrels per day – Brent crude would most likely have traded in the low USD 70’s or perhaps even lower. So, while the efforts have not yielded higher prices many of the producers need to balance their budgets, prices have held steady and high enough to ensure robust production growth from non-OPEC+ members. Not least the US which according to EIA’s latest Short-term Energy Outlook could see production accelerate to a record 13.65m barrels/day in 2025 from 13.19m barrels/day this year.
Crude trades higher today after yesterday’s hotter-than-expected US inflation print did little to alter the market's view on the timing and subsequent depth of incoming growth-supportive US rate cuts. In addition, the market also received a boost after the American Petroleum Institute reported across-the-board reductions in US crude and fuel stocks (see table insert in chart above). Before then the market had slipped after OPEC in their latest monthly update wrote supply cuts had stalled as Iraq for a second month produced around 200k barrels/day above its quota.
At this time of year, US crude stocks tend to rise while fuel stocks drop amid lower refinery activity during the annual maintenance season. Stock levels of all three trail their five-year averages, not least distillates or diesel inventories which have fallen for seven straight weeks, hitting the lowest level since December. If confirmed by the EIA later today, the API reported drop in crude oil stocks would be the first in seven weeks. I will post the results of the EIA report on X at @ole_s_hansen once published at 13:30 GMT.
Managed money accounts, such as hedge funds and CTA’s, have been a main source of price support in recent months with net buying since December 15 driving up the combined net long by 250,000 futures contracts (250 million barrels) to 421,000, and while the initial buying was concentrated in Brent amid supply disruption risks, WTI has been the main recipient during the past month. However, with the upside momentum now showing signs of stalling that buying support may stall as well, leaving both crude contracts exposed to long liquidation should prices turn lower.
For now, as mentioned we see no catalysts on the short-term horizon strong enough to force a change, with day traders focusing on rangebound trading strategies instead of looking for breakouts to drive fresh momentum.
Commodity articles:
8 Mch 2024: Commodity weekly: Gold and silver steal the limelight
8 Mch 2024: Investing with options - Gold optionality
6 Mch 2024: How to add gold exposure to your portfolio
6 Mch 2024: Video: What happened to the gold prices?
1 Mch 2024: Grains dip, cocoa soars, gold and oil see rays of strength: February’s commodity mix
29 Feb 2024: Podcast: Why speculative interest is important to understand
28 Feb 2024: Oil price stuck in neutral despite underlying strength
27 Feb 2024: Resilient gold market defies lower rate cut predictions
22 Feb 2024: Copper short squeeze fades ahead of key resistance
21 Feb 2024: Gold's resilience despite recent futures and ETF selling
20 Feb 2024: WTI crude eyes resistance amid improved signals
16 Feb 2024: Commodity weekly: Grains tumble; Industrial metals eye China boost
15 Feb 2024: US rate cut delay drives gold below $2000
13 Feb 2024: Video: What is driving Cocoa's sweet price
9 Feb 2024: Commodity weekly: Refined product strength lifts crude
9 Feb 2024: Podcast: Year of the metals
7 Feb 2024: Crude oil supported by tightening fuel outlook
6 Feb 2024: Gold and silver turn defensive on reduced Fed rate-cut optimism
2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
Previous "Commitment of Traders" articles
11 Mch 2024: COT: Specs rush back into gold, elevated yen short in focus
4 Mch 2024: COT: Underinvested speculators fuel gold's latest surge
26 Feb 2024: COT: Record corn short, cocoa surge no longer supported by speculators
19 Feb 2024: COT: US inflation surprise drives broad selling of metals
5 Feb 2024:COT: Speculators chase false crude break; grain short extends further
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
