WTI crude - the trend is higher but risks are increasing
With OPEC meeting out Wednesday both Brent and WTI crude are front and centre this week – we also know higher crude prices are key for inflation expectations, and the move into $90 has supported US 5Y5Y swaps at 2.48%.
Traders are buying into crude to hedge against sustainably high inflation, but It feels like the market is long of crude as a hedge against geopolitical issues in Ukraine and the perception of supply being impacted. Demand is still a positive factor, with views Q1 22 should see a 6.8% increase in demand, followed by 5.9% in Q2 – Along with low inventories and reduced spare capacity, these are two clear factors promoting analysts to increase Brent forecasts above $100, with a belief demand increases to 100mbd and the belief we could head into deficit this year.
Looking at output, it feels almost a given that OPEC will hike output by 400,000 bpd at this meeting – with prices above $90 clearly if they don’t lift output as planned then the oil market will fly – but that would be a huge surprise. Could they hike by more than 400k? Perhaps, but I think OPEC will be happy that while we have seen a lift in the US rig count, and we haven’t seen a sharp pick-up in market share from US share producers.
We also know there are nations such as Nigeria and Angola which aren’t producing as much as they can.
Looking at futures holdings through managed money, the market is certainly long of crude but not at extremes. We also see steep backwardation in the futures curve, and traders are incentivized to be long to pick up carry from rolling down the curve upon expiration.
We assess the risk to reward trade-off – firstly, let's consider crude has closed higher for six straight weeks. We saw seven consecutive weeks in September before we saw a 27% correction into $62.90, so the risks are moving towards another downside move. Last week we also saw a bullish engulfing, so its clear there is strong demand to buy weakness and flow is still bullish – so if we do see sellers into the mix, then last weeks low of $82.42 comes into play.
On the daily, price is holding the 5-day EMA, so a close below here would spark interest, as would a rollback below breakout high of $85.75. A break here should see crude into $79.31 (the 38.2% fibo of the Nov/Jan rally), but it feels that on current dynamics this should contain the selling.
Traders are buying into crude to hedge against sustainably high inflation, but It feels like the market is long of crude as a hedge against geopolitical issues in Ukraine and the perception of supply being impacted. Demand is still a positive factor, with views Q1 22 should see a 6.8% increase in demand, followed by 5.9% in Q2 – Along with low inventories and reduced spare capacity, these are two clear factors promoting analysts to increase Brent forecasts above $100, with a belief demand increases to 100mbd and the belief we could head into deficit this year.
Looking at output, it feels almost a given that OPEC will hike output by 400,000 bpd at this meeting – with prices above $90 clearly if they don’t lift output as planned then the oil market will fly – but that would be a huge surprise. Could they hike by more than 400k? Perhaps, but I think OPEC will be happy that while we have seen a lift in the US rig count, and we haven’t seen a sharp pick-up in market share from US share producers.
We also know there are nations such as Nigeria and Angola which aren’t producing as much as they can.
Looking at futures holdings through managed money, the market is certainly long of crude but not at extremes. We also see steep backwardation in the futures curve, and traders are incentivized to be long to pick up carry from rolling down the curve upon expiration.
We assess the risk to reward trade-off – firstly, let's consider crude has closed higher for six straight weeks. We saw seven consecutive weeks in September before we saw a 27% correction into $62.90, so the risks are moving towards another downside move. Last week we also saw a bullish engulfing, so its clear there is strong demand to buy weakness and flow is still bullish – so if we do see sellers into the mix, then last weeks low of $82.42 comes into play.
On the daily, price is holding the 5-day EMA, so a close below here would spark interest, as would a rollback below breakout high of $85.75. A break here should see crude into $79.31 (the 38.2% fibo of the Nov/Jan rally), but it feels that on current dynamics this should contain the selling.
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