TARGET PRICE: $86-88/bbl
Shifting from elections to hurricanes
Oil futures had plenty of uncertainty to draw from last week, from elections to weather risk, allowing the front-month Brent contract to end the week higher compared to the previous Friday’s close. Brent reached a zenith of nearly $88/bbl on 05 July before slightly tapering off. In the meantime, money managers continued to add net length, albeit their long/short position ratio is still well below the levels in April. If Brent is off to a sluggish start this morning, in our view, the positive momentum of late will likely take the North Sea marker between $86-88/bbl by Friday based on the following factors.
- Weather risk to supply
- Seasonal expectation around summer gasoline demand in the US.
- Positive risk sentiment, with expectations of Fed policy rate cuts rising
Focus is back on the weather this week, with Hurricane Beryl causing the closure of oil infrastructure on the US Gulf Coast. The hurricane was, at one point, the earliest Category Five hurricane ever recorded before being downgraded to a storm status. However, Beryl regained strength over the weekend as a Category 2 hurricane, leading Texas’ largest ports to shutter in preparation (including major oil ports around Corpus Christi, Galveston and Houston) and disrupting crude oil and product imports and exports.
We see rising hope for global summertime demand. ICE’s CFTC COT data highlighted an increase in managed-by-money net length by over 37mb w/w to over 190mb in the week ending 02 July. In addition, open interest eased by around 22mb w/w to 2460mb, pointing to further room for new bullish interest. While the US remains the main focus for summer gasoline demand, the market still can take heart from the last set of demand data out of India for June: gasoline deliveries were strong at +2.6% y/y, despite being down 3.53% m/m following last month’s general election.
While the typical negative correlation between the dollar and oil has not quite been itself lately, it does not hurt Brent’s prospects that the DXY has taken a leg down to 104.90 from the peak of 106 on 02 July. Non-farm payroll data beat expectations last week, but previous data were revised down. Moreover, the US unemployment rate rose to 4.1%, suggesting a cooling labour market.
Thursday, we have US CPI data, with a consensus forecast looking for a y/y change for June at 3.1%. If US inflation comes in line or lower than expected, this strengthens the case for the Fed cutting its policy rate. The dual outcome could be more dollar weakness and a further rally in equities, both supporting oil pushing higher. The US OIS (Overnight Index Swaps) now prices exactly 50bp of cuts this year, 19.5bp of which are expected in the Fed’s September meeting.
Political and weather wildcards
The elections in France certainly surprised pundits, with far-right Rassemblement National (RN) barred from achieving a majority. However, the split of votes is such that achieving a new and stable government may prove difficult. So far, we have yet to see any gyrations in the EUR/USD exchange rate, although volatility in the exchange rate may spill over to other markets, including oil. Finally, the impact of Hurricane Beryl has yet to be determined – if benign on refinery output and operations, then crude is unlikely to benefit from an uplift in product prices.
