Oil prices dipped slightly into Monday, back into $81/bbl handles, after seeing a 6% gain last week having fallen 9% a week previous, with heavy price swings very characteristic of the market at the moment.
Focus remains very much on tensions in the Middle East with prices last week finding further support from strong gasoline and diesel markets, as both planned and unplanned refinery downtime tightened product markets.
CFTC data for the week to February 6th indicated long money managers closed out of their positions in Brent futures at the fastest rate since early October, potentially signalling some profit-taking from these players, while shorts continued to exit positions for the second consecutive week. Should these players return en masse, this could send prices higher in the week – so we would keep a close eye on developments in the Middle East, which could play on this speculative market sentiment.
More cues on US interest rates are expected on Tuesday, and with CPI data expected to have remained sticky in January, this may encourage the Federal Reserve to keep interest rates higher for longer, with one Federal Reserve official saying she had no interest in recommending a rate cut. However, we would be wary of any comments that could signal a potential cut to rates in the coming weeks which might see the market start to look to price this in.
For a surge above $85/bbl in Brent this week, we expect a combination of more dovish comments from the US Federal Reserve, strong demand forecasts from OPEC and the IEA in their respective monthly reports to be released on Tuesday and Thursday, and a larger than expected draw in crude stocks would all be needed to encourage more buying from speculators.
However, we would be wary of thin liquidity with the Asian market out on holiday which could encourage players to take a more risk-off approach. Therefore, in terms of a target for the week, we expect prices to remain very rangebound in the low $80/bbl handles. Should levels break below the $80/bbl level, this could catalyse a further move lower as potential profit-taking from in the money bulls could exacerbate the move.
