By Ole Hansen, Head of Commodity Strategy at Saxo Bank
A quick note on oil which so far has tumbled 7.5% today in its biggest one-day crash since October. We have for a while now been arguing the price of oil had reached levels that was no longer supported by current fundamentals. Adding to this rising risk adversity from the relentless rise in bond yields and an elevated spec long which stop growing more than a month ago.
WCU: Yields keeping a lid on commodities; Oil maxed out (March 12)
Crude oil traded close to unchanged on the week as the market struggled for direction. Earlier in the week, a failed attack on a Saudi oil installation drove Brent crude above $70/b but the 7% correction that followed could reflect a market that potentially may have gotten close to its current potential. Despite being supported by the US stimulus Bill and signs of a fuel consumption rebound around the world, the market is still waiting to see a sustainable pickup in global fuel demand that can justify current oil prices.
COT: Rising yields cut dollar shorts and commodity longs (March 15)
Crude oil’s +7% rally in the week to March 9 that was partly driven by a temporary risk spike following the attempted attack on Saudi oil installations, only triggered a small 2.8k lots net increase in the combined crude oil long in WTI (+7.6k) and Brent (-4.8k). During the past four weeks a 12% rally in crude oil has triggered no additional increase in the combined net long which currently stands at a 2-1/2-year high at 731k lots. While rising US bond yields and the stronger dollar has lowered investment appetite, these developments also support our view that crude oil has reached a level beyond which can be hard to justify given current fundamentals.
Oil lower as yields rise and IEA talks down super-cycle risks (Yesterday)
In their latest monthly Oil Market Report, the IEA raised questions about some of the reasons that has supported Brent crude oil’s recent surge to $70/b. Especially the risk of a new super-cycle and a looming shortfall was given a cold shoulder. Not only do they see ample oil inventories despite a steady decline from the massive overhang that piled up during 2Q20. The also highlighted the hefty amount of spare production capacity, currently in the region of 8 million barrels/day that is being held back by OPEC+ members.
In a couple of recent interviews I said that OPEC+ following their March rollover of production will have to increase production in April. Failure to do so could risk send the price of oil lower as the market would see that as a sign of continued demand weakness. Keeping production tight in order to send the price higher into a still weak demand outlook may prove to be counterproductive at this stage in the recovery.
What broke it today was the combination of IEA’s report yesterday and the accelerated rise in US yields which is raising volatility thereby forcing broad risk reduction, especially in markets where the speculative interest is elevated. Examples being oil and the grains sector which is also suffering losses today.
From a technical perspective the next level of interest in Brent is $62, the double bottom from February and March. Beyond that, but highly unlikely, the next level of support would be down towards $57.8/b where Dr. Fibonacci is likely to come to the rescue.