TARGET PRICE: $80/bbl
PRICE: $82/bbl
Brent trumped bearish macro sentiment and the EIA stats.
The likely unwinding of stretched short positions trumped bearish drivers this week, driving Brent above our end-week target.
On Monday, we expected August Brent Futures to end the week close to $80/bbl, with a slight bearish bias. On Friday morning, the Aug contract traded at $82/bbl handles. We expected weakness due to the three main drivers listed below. Interestingly, these factors have not become invalid or untrue, but the market has strengthened despite them.
- USD strength
- Weakness in refinery margins
- Very short market positioning
We expected the USD’s strength to weigh on prices, which has undoubtedly stymied growth as crude becomes more ‘expensive’ in other currencies; we have seen further strength in both the USD and crude. The USD retained its strength this week, crucially due to the Federal Reserve’s decision on Wednesday to hold its key interest rate at 5.5%. The Fed now projects just one rate cut in 2024, down from multiple in its previous projection. The decision of the Bank of Japan on Friday morning to hold rates at 0.1% also served to retain USD strength and further weaken the flailing yen.
Oil demand forecasts from the supply and demand giants have been predictably completely irreconcilable. OPEC reaffirmed its forecast of strong oil demand growth, projecting an annual increase of over 2.25mb/d. In contrast, the IEA cautioned about a potential supply surplus of up to 8 mb/d due to a drop in demand and overinvestment in production capacity. OPEC criticised the IEA’s warning, labelling it reckless and suggesting it might cause significant volatility in the oil markets. This failed to inspire real direction and may further contribute to a risk-off attitude exemplified by the comparatively low open interest.
The EIA stats released on June 12 were more bearish than expected but well absorbed by the market. US crude inventories rose by 3.73mb in the week to June 7, and distillate and gasoline stocks rose. The gasoline stock increase was particularly impactful to the market as RBBRs fell to $18.30/bbl handles immediately after the announcement. The forecast suggested weak refinery margins in Europe were a bearish signal, as there is less crude buying incentive. We have seen the margins continue to soften over the week, with a 38c loss to the European M1 margin.
CTA positioning has begun to rise, although it remains net short, which may have provided some support, as suggested on Monday. The Onyx CTA net positioning model rose to –64.5k lots on June 14 from –149.1k lots on June 10. Although this remains negative, it has risen significantly in the week, which somewhat explains the supported prices.
