Article / 07 March 2018 at 10:38 GMT

Fundamentals and Trump weigh on oil prices – #SaxoStrats

Head of Commodity Strategy / Saxo Bank
crude oil storage facility
 A global trade war would jeopardise economic growth and hence, demand for oil.
Photo: Shutterstock

By Ole Hansen

Crude oil has settled into a range as the price ebbs and flows with developments in global stocks. While oil fundamentals have softened, speculators maintain a strong belief in higher prices. This belief risks being tested should Trump go ahead with planned tariffs on steel and aluminium as it raises the risk of a trade war that would damage growth and punish stocks.

During the past few weeks crude oil has been focusing more on yo-yoing stocks than oil fundamentals, which have been showing signs of weakening. 

Crude oil and stocks
Source: Saxo Bank

Strong non-Opec oil production growth look set to challenge Opec and Russia's ability to maintain price stability, at least in the short term. In the latest Short Term Energy Outlook the EIA sees US oil production averaging 10.7 million barrels/day in 2018, an increase of 1.4 million barrels/day from 2017. The IEA added to the unease when they in their Oil 2018 report said that oil production growth from the United States, Brazil, Canada and Norway would more than meet global oil demand growth through 2020. 

An escalating trade war should Trump decides to go ahead with his tariffs and other measures risks putting global growth projections in jeopardy and crude oil demand growth may suffer as a consequence. 

The EIA continues to raise 2018 non-Opec supply growth while keeping demand growth steady. Monthly reports from Opec and IEA are due on March 14 and 15. 

Non-Opec supply and demand growth estimates

Last week funds increased the combined long oil bet in WTI and Brent for the first time in five weeks by 36,000 lots to 1 million lots. This after cutting it by a total of 133,000 lots during the previous four weeks. The dwindling short base led to another rise in the long/short ratio to a record 12.6. This highlights a continued downside risk to oil should the technical and/or fundamental outlook turn less favourable.

Speculative positioning in Crude oil

The overnight weakness in crude oil was driven by the double blow of a bigger-than-expected crude oil inventory build being reported by the API and stock market weakness following the news of Gary Cohn's departure from the White House. His exit is seen as a victory for figures within Trump's inner circle who advocate against free trade and globalisation. 

The EIA will publish its weekly stock, trade and production report at 15:30 GMT today. 
EIA survey and recent results

Given the recent resilience among speculative investors they are unlikely to worry about a deeper correction as long as prices stay above $61/b on Brent crude oil and $57.50/b on WTI crude. These levels represent the 38.2% correction of the June to January rally and while above the current price action, will be viewed only as a weak correction within a strong uptrend.  

For now WTI crude oil has settled into a $60 to $65 range with outside market events providing most of the input for daily price swings. 
WTI crude oil, first month cont.
 Source: Saxo Bank

– Edited by Clare MacCarthy


Ole Hansen is head of commodity strategy at Saxo Bank

07 March
Ole Hansen Ole Hansen
Crude oil inventories rose by 2.4m barrels while both gasoline and distillate stocks were lower. Production rose another 86k b/d while stock withdrawals at Cushing slowed to 605k barrels. Small positive price reaction across the board.
07 March
Ole Hansen Ole Hansen
EIA charts
07 March
The Grinch The Grinch
Ole, thank you.
In past posts, you've highlighted the lower grade of shale compared to crude. How do you see this impacting markets?
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