Technicals, geopolitics and FX are strong headwinds in oil’s path towards USD100/b

Global commodities

Oil at USD100/b is now in play, although it will not be a smooth ride before the king of the commodities complex makes a challenge for the crown. The oil market is tightening at a rapid clip as Saudi Arabia and Russia turn the spigots at a time when global oil demand is at all-time highs. In its latest monthly outlook, OPEC forecasts a deficit of more than 3m b/d in Q4 2023 – the largest shortage in more than a decade. Such an acute drain of global oil inventories (already at depleted levels and falling precipitously), strengthens the narrative for further upward pressure on oil prices. Indeed, hedge funds are piling back into the space, with open interest on USD100/b calls currently the most held strike over the next 12 months. Yet, we believe a pause in the heady pace of crude’s recent surge is now likely owing to technicals, geopolitics and FX. First, Brent’s 14 day relative strength index (RSI) has been above 70 (overbought territory) for the past seven trading days, signalling that a breather is overdue. Second, the aggressive supply management of OPEC+ risks both (i) hampering the demand for its own barrels should prices runaway to levels that accelerates demand destruction (which runs counter to the group’s resolute medium-term stability mandate) as well as; (ii) causing US gasoline prices to surge at a time of political importance in the run-up to the US presidential elections. Third, elevated oil prices risks fanning the flames of global inflation, strengthening the case for higher for longer rates and adding backbone to the US dollar – which could restrain oil. Whilst tight fundamentals suggest that the gravitational tilt for prices are to the upside, we however maintain our year-end 2023 and 2024 Brent crude target of USD84/b and USD87/b, respectively, with a surge back north of USD100/b – albeit within striking distance – not our base case scenario (see here).

Energy

Oil is steadying after rallying to a 10 month high on forecasts by OPEC and the EIA that production cuts will tighten the market in the months ahead. We continue to believe that the recent price rally is running out of steam with the large leg up already been materialised and look for Brent to subside back into the mid-80s range for the remainder of the year (see here). Meanwhile, in natural gas markets, Australian strike action that commenced on 8 September at the Gorgon (16 mtpa) and Wheatstone (8 mtpa) LNG export facilities, have not yet impacted LNG exports, resulting in European natural gas (TTF) prices remaining in the EUR30-35/MWh range witnessed over the past month.

Base metals

Directional conviction remains bleak across the base metals complex. As we have recently catalogued, absent an end to the global manufacturing slowdown, the demand environment is set to remain a softening risk to balance and upside restraint on prices (see here). The risk going forward is that the duration of the manufacturing downturn extends into 2024, in part owing to the piecemeal pace of Chinese policy easing, alongside the industrial supply chain reverberations from higher for longer rates across developed markets.

Precious metals

Gold has continued its bearish momentum with the robust August US CPI print, reinforcing bets that US rates will stay higher for longer. As a non-yielding asset, gold is having to compete for a place in portfolios (less of an issue when bond yields are low, but more challenging as yields rise). With central banks raising interest rates (with the exception of China), its intuitive that gold ETF holdings are now the lowest since early 2020 and net long positioning is the lowest since March, with significant new shorts added.

Bulk commodities

Iron ore’s recent resilience is being tested with fresh data showing a recent spurt in Chinese home sales losing momentum (less than two weeks after authorities eased mortgage restrictions). This reinforces our continuous downside caution on iron ore, with micro conditions offering prospects of a softening turn with the surplus trajectory expected in the remaining months of 2023 (see here).

Agriculture

Corn prices have fallen to one month lows after a US Department of Agriculture (USDA) report forecast corn yields at slightly above market expectations, sending stocks higher. In its latest WASDE, the USDA estimates 2023/24 US corn production to rise by 23m bushels to 15.134bn bushels as a sizable harvest offsets falling yields.

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.