Brent crude futures erased last Friday’s gains amid renewed Israel-Hamas peace talks which has moderated geopolitical tensions. The July contract was trading above $89/bbl handles on Friday before gapping below $88/bbl on Monday, trading at $87.50/bbl by 08:30 BST. Following Friday’s PCE data which showed inflation heading in the wrong direction, fears of higher-for-longer US interest rates have also been a bearish factor for crude oil prices.
Over the weekend, Hamas said that it has received Israel’s official response to its latest Gaza ceasefire proposal and will study the document before submitting a reply. An Egyptian delegation visited Israel on Friday, and it was revealed that Israel was willing to consider a limited truce with in which 33 hostages would be released by Hamas, instead of the 40 previously under discussion. It is estimated that 129 hostages captured since October 7 are still being held in Gaza.
In terms of market positioning, amid the waning geopolitical premium, money managers continue to liquidate length in crude futures, with long positions falling by 6%, or 23.4mbbls, in the week to April 23. Alongside this, net positions saw a significant decline in ICE gasoil futures, falling from 81.4mbbls to 50.0mbbls on the week (60th to 37th percentile, the largest weekly decline since February 2023.
Futures markets are now pricing in just 35bps of cuts this year, compared to the over 150bps at the beginning of the year. PCE inflation for March indicated a 2.7% rise year-on-year, above the Fed’s target of 2%. As a result, participants are expecting a more hawkish tone in the FOMC meeting this week, with rates to be unchanged.
June Brent futures will expire on Tuesday. The North Sea complex has seen a strong performance in the lead-up to this, with the Jun/Jul Brent futures spread supported above $1/bbl levels and the Jun/Jul/Aug fly also rallying, suggesting healthy appetite for June-loading barrels. In addition to the FOMC outcome, key economic data this week include Chinese PMIs on Tuesday, the US ISM on Wednesday, and US non-farm payrolls on Friday.
As US inflation remains stubborn, the conversation has shifted towards whether the Fed will cut interest rates at all this year, which is a heavy contributor to downside risks in oil. The Israel-Hamas conflict is reaching a critical point, where peace talks will be held in Cairo as mediators are stepping up efforts to reach a deal ahead of an expected Israeli assault on Rafah. The market does not expect a wider spillover of this conflict, and considering these factors, our view for the week ahead is bearish, and we expect crude prices to retreat to $85-87/bbl levels.
