The outlook for demand for key commodities, not least energy, remains challenged by the not yet under control Covid-19 pandemic. While the situation in Europe, except for the U.K., and China among others have improved, globally it is still worsening with a record number of new cases being reported – mostly in the Americas and South Asia.
There are more and more indications that a possible second ware of the pandemic could be taking hold in some U.S. states and that was the key driver behind the latest market developments. Not least considering that most countries experiencing a second wave, including the U.S., are unlikely to adopt renewed lockdowns measures for fears of the economic impact.
These developments helped send crude oil sharply lower to record its first weekly drop since April. The risk of a second wave slowing the recovery in global demand will pose multiple challenges. Not least to the OPEC+ group of producers who just recently managed to agree to a one-month production cut extension.
These cuts now translate into spare capacity which can be brought back when the demand has recovered and the global overhang of stocks has been lowered. The group can for a period control supply, but not demand and a weak recovery in demand may challenge the group’s resolve with the risk of quota cheating emerging.
The impact of Saudi Arabia’s ill-timed price war back in March continues to be felt in the U.S. where millions of extra barrels of imported oil from the Kingdom have helped send commercial stocks to a record high. While these flows will slow over the coming weeks, the positive impact on prices may not materialize for some time due to the combination of elevated gasoline and not least distillate stocks and the slow process with which demand continues to recover. Adding to this the risk that some shale oil producers may start to increase production as long forward prices remain around current levels.
Both WTI and Brent crude oil did not manage to close the gaps that were left open when the markets collapsed in early March after Saudi Arabia embarked on its short-lived price war. Instead, the market behavior following the agreement by OPEC+ members to extend the 9.7 million barrels/day production cut until the end of July, ended up signaling the beginning of an overdue correction/consolidation.
Hedge funds have been strong buyers of WTI crude since early March with the net-long reaching 380 million barrels in the week to June 2, the largest bullish bet on WTI crude oil since August 2018. While our longer-term bullish outlook hasn’t changed the next few months may look a bit more challenging with renewed Covid-19 outbreaks in the U.S. being the trigger that reduces the speculative position.
Crude Oil SHORT (Sell)
ENTER AT: 34.13