CRUDE IN SIGHT

Crude pares gains early Thu amid questions over validity of Wed's rebound - Aug. 11, 2022

  • Crude futures were unwinding some of Wednesday’s gains early Thursday in Asia amid profit-taking and doubts over both the factors that bumped up prices in Wednesday’s session.
  • The US on Wednesday reported consumer inflation of 8.5% for July, a cool-off from June’s 9.1% print, which buoyed investor sentiment and risk appetite.
  • The country’s Energy Information Administration reported a weekly plunge in gasoline stocks and jump in demand, which also helped prop up crude.

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OIL VIEWSLETTER

Crude erases Ukraine war premium on fear of demand collapse - Aug. 5, 2022

There may be a summer holiday lull in pockets of the world, but the bad news just keeps rolling in.

July PMIs in major economies across the globe showed a deceleration or downright contraction in factory activity from the prior month.

The cost-of-living crisis is badgering consumer confidence around the world.

The second-quarter financial reporting season has generally brought good news, but investors as well as the corporate world are bracing for a far tougher second half, with an eye on central banks coming under increasing pressure to tap the brakes harder.

Mass layoffs in fintech and tech companies are growing and there are concerns that the bloodletting may widen to other sectors. 

With oil supply worries, which dominated market sentiment through March-June following Russia’s invasion of Ukraine, remaining sidelined and concerns over weakening global oil demand growing bigger, Brent and WTI futures prices tanked by 14% and 10% respectively this week, ending up at pre-invasion levels.

As we have said before, it remains difficult to assess oil demand trajectory for the coming months, given that the debate over the likely timing, length and depth of any recession in the major economies itself is not settled yet. 

But fear, as we know, is a powerful force even if divorced from reason. The market has swung from four months of fear over supply shortages to fear over collapsing demand. 

The worst of the supply shortage scenarios on account of the West’s sanctions against Russia did not pan out and all the demand destruction currently being priced in may not materialise, either.

But brace for an extended period of volatility and the oil market flying blind.

Meanwhile, the OPEC/non-OPEC’s minuscule hike in September output target came in for a lot of political dissection, but we draw your attention to some key messages from the alliance this week that were lost in the noise but offer a crucial insight into its future direction.

 

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BULLS & BEARS

Aug 2022: Neutral near-term, mildly bullish mid-Aug to mid-Sep - July 29, 2022

The financial markets have just been through a particularly turbulent week, with the Fed’s interest rate decision on Wednesday and the US’ second-quarter GDP data on Thursday keeping investors on the edge of their seats. Crude was dragged along for the roller-coaster ride in sentiment.

The net impact of the two big events – and one that wasn’t diluted by any other unforeseen developments – was a sense of relief

Announcing a rate hike of 75 basis points as expected, Fed Chairman Jerome Powell said interest rates had reached a “neutral level”, a jargon to mean that the monetary policy was now neither accommodative nor restrictive. The term is used to describe interest rates that are consistent with full employment and price stability.

The US Q2 GDP coming in at a worse-than-expected 0.9% contraction (after shrinking by 1.6% in Q1), bolstered expectations that the Fed would need to slow its pace of interest rate increases. 

That was a positive for the stock markets and as it turned out, also for crude, which was almost completely being led by the risk appetite in the broader financial markets.

Of course, there is much more going on in the oil markets. And though supply-demand fundamentals appear to have taken a back seat, they could storm back to the centre-stage at any time.

Our latest Bulls & Bears report concludes:

  •  Neutral sentiment for the near-term
  • Mildly bullish sentiment for mid-Aug to mid-Sep

The Neutral sentiment points to crude entering consolidation mode after the rally of the last few days. The soon-to-be front-month October Brent futures were trading around $103.88/barrel as we closed the report. September Brent futures were around $98.30. That was a cumulative weekly jump of about 5.5% for Brent and 3.7% for WTI. We expect the week’s relief rally to be a spent force soon but could help prices resist any major downward pressure for the next couple of weeks.

The Mildly Bullish sentiment for mid-Aug to mid-Sep assumes that extreme bouts of risk-aversion and panic selling of risk assets may take a short break. With the financial markets not weighing on crude sentiment, the worsening energy crisis in Europe and the OPEC/non-OPEC alliance’s continued production restraint and constraints could lend crude some buoyancy. However, any price gains would be modest, kept in check by continuing reminders of the gathering global economic headwinds.

 

 

 

 

 

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