Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 06 February 2018 at 14:19 GMT

Oil at risk as funds begin to line up near the exit — #SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • Risk-off sentiment weighing on oil prices
  • Refinery maintenance starting to impact demand
  • Brent remains vulnerable to Q1 decline

The sharp correction seen in equities and risk sentiment 
has hit crude oil prices as well. Photo: Shutterstock

By Ole Hansen

The combination of rising risk-aversion and fading short-term fundamental support continues to put downward pressure on oil. A record bet on rising crude prices needs to be fed bullish news and as that begins to fade, the risk of a correction rises. 

With hedgers holding the short position, who is going to provide the liquidity required to avoid a rout?

One of the interesting features seen during the multi-month rally in oil has been the raised hedging activity carried out by swap dealers on behalf of oil producers. As a result, we now have an oil market with a record long being held by speculative accounts and a record short held by swap dealers. 

Oil positions held by funds and swap dealers
During the rally, this resulted in buyers and sellers having no problem finding the opposite side. A correction, however, breaks down this relation with the short position being in no hurry to cover. That risks create an uneven market conditions, which is why oil long liquidation phases can be quite painful. 

Both WTI and Brent crude have suffered mild losses after failing last week to extend the rally beyond $71.40/barrel on Brent and $66.90/b on WTI. These levels represent the 50% retracements of the 2014 to 2016 selloff. 

The short-term fundamental outlook has turned less favourable with seasonal refinery maintenance in the US and elsewhere beginning to negatively impact demand for crude. Meanwhile, inventories (due Wednesday) are according to a Bloomberg survey set to rise for a second week, this time by 3.2 million barrels. 

The recent contraction of the spread between WTI and Brent could impact US exports thereby leaving more barrels at home while production continues to rise with monthly data for November showing a breach of 10 million barrels/day. 

US crude oil stocks, production and trade

Later today the EIA will release its "Short Term Energy Outlook" with the market looking for any changes in its outlook for non-Opec supply and world demand growth. In recent months demand has held steady while non-Opec supply has been revised higher, primarily as a result of rising US production. 

Oil reports

Continued weakness in stocks is likely to add to the nervousness currently creeping into the market and we maintain the view from our Q1 outlook, called "How to spot a bubble", that Brent crude could be exposed to a 10-15% decline this quarter. 

This could see it the return towards $60/b before stabilising within our $60-$70 preferred range. 

Brent crude oil has so far found support after reaching its 50-day moving average at $66.54/b.

Brent Crude oil, first month cont.
Source: Saxo Bank 

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank


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