Oil Industry Salivating Over Potential Trump Victory
Brent crude futures opened on Monday morning and has traded rangebound around $85/bbl in its Sep’24 contract. The market reaction to the assassination attempt of Donald Trump on 13 July has been relatively muted, although the US dollar and yields gapped up on the market open. Whilst the impact on oil prices remains unclear, Trump’s re-election odds have soared, and it is widely expected that a Trump administration will be favourable for the oil and gas industry. We anticipate a neutral week for Brent crude futures and expect prices to trade around the $84 to $86/bbl range. We are keeping a close eye on the following factors:
- Economic uncertainty in China
- US macroeconomic headwinds
- Market positioning
China is a black box when it comes to the oil market. Its recent economic struggles will be front and centre at this week’s third plenum, which sets the tone for the country’s long-term social and economic policies. China’s economy grew by 4.7% y-o-y in Q2, missing economist forecasts, and is the weakest growth rate for five quarters. Retail sales also missed expectations, underscoring weak consumer sentiment. China’s crude oil imports were 11.3mb/d in June, 11% lower than in June 2023. It remains to be seen which stimulus measures will be announced, how market participants will digest this, and whether this will materialise in stronger oil demand.
The US has also encountered macroeconomic headwinds, and market participants now expect an earlier rate cut. Interest rate futures markets are now pricing in a full rate cut at the Fed’s September meeting. The Michigan consumer sentiment has fallen sharply, dropping to an 8-month low. Despite inflation easing, consumers remain negatively impacted by the lingering cost of living crisis, eroding their living standards. The market will closely monitor the two upcoming non-farm payroll employment reports before the September meeting. Negative data indications could increase the likelihood of rate cuts which may be bullish for oil prices.
Market positioning in Brent crude futures is relatively balanced, with the capacity for price action to trend in either direction. Despite money managers increasing their length in Brent futures for a fourth consecutive week, net positioning remains lower than between February and April. Moreover, CTA positioning in Brent is on a downward trend, as net positioning has fallen from +23k lots to +10k lots w-o-w. As such, the current level is distant from both extreme ends. With volatility in Brent at 9-year lows, the market is simultaneously in equilibrium but also in a wait-and-see mode as it awaits further clarity from China’s third plenum and US macroeconomic indicators.
