TARGET PRICE: $82-84/bbl
Although we expect Brent futures to remain supported above the $80/bbl region, we hold a neutral outlook this week, with the front-month August contract to finish the week between $82/bbl and $84/bbl. This is predicated on three main drivers:
- Mixed macroeconomic data
- Mixed refinery margins
- USD strength
While crude oil saw its largest weekly gain in nearly two months following OPEC’s efforts to assuage the market, its upside remains capped by mixed macroeconomic sentiment. Weakening US consumer sentiment and mixed Chinese economic data have hampered global demand sentiment. US consumer sentiment unexpectedly fell to a seven-month low on personal finances and inflation concerns. In China, industrial production was lower than expected in May, while its new home prices fell at the fastest pace in nearly 10 years. Moreover, China’s crude inventories are increasing and are above the same period in 2023. Higher crude storage and lower oil imports have undermined expectations of China’s crude demand growth in 2024.
Although the middle distillates market performed strongly last week, the extreme weakness in the gasoline market offset this. As fundamentals improved, better physical buying emerged in the physical Northwest European (NWE) gasoil market. Crucially, the front-month gasoil crack and spread surpassed $20/bbl and flipped into backwardation, respectively. Furthermore, jet fuel is expected to be a significant driver of oil demand growth this year, with the International Air Transport Association (IATA) forecasting record passenger numbers this year, exceeding pre-Covid levels. On the other hand, the gasoline market continued to deteriorate as EIA stats indicated a higher-than-expected build, with PADD3 stocks notably increasing. The July NWE gasoline crack is down from $16/bbl to $14/bbl week-on-week. The relative improvement in distillates and decline in gasoline could support medium-sour crude grades but weaken light sweet crude.
The strength of the US dollar may cap further gains in Brent. The dollar index is above 105.5, its highest level since early May, with the market expecting the Fed to cut interest rates just once this year. This comes as US inflation figures for May revealed softer-than-expected figures. A sharp depreciation of the euro supported the dollar due to concerns that a new government would worsen France’s fiscal situation ahead of its snap election.
The latest ICE CFTC data indicated a risk-off week as money managers reduced speculative long and short positions in Brent futures. Long positions declined for the sixth consecutive week, while short positions fell by 38mb (-23%), the biggest since December 2023. This follows the substantial increase in shorts the previous week, implying that the recent strength in Brent was from in-the-money shorts taking profit. With long positions at their lowest level since December 2023, there is capacity for new speculative length to enter, provided that a catalyst reinforces bullish crude sentiment.
