Oil spreads increase in anticipation of OPEC+ meeting

By  Trend

The energy sector led with losses this past week in the commodities trading race, while other sectors like metals and agriculture saw no significant fluctuations except for mixed trading numbers, the Head of Commodity Strategy Ole S. Hansen at Saxo Bank told Trend.

"These recent trading results are the direct and indirect causes of the political situations in Spain and Italy, as well as Donald Trump’s decision to implement duties on imports of steel and aluminium from US allies in addition to a range of tariffs on goods from China. In light of these events, the stock market saw core bond yields lower and the dollar rise higher while raising concerns about global growth," Hansen said.

The expert said after Saudi Arabia and Russia opened to the possibility of raising production of crude oil, the commodity became the headliner in trading. Hansen noted that a significant widening of WTI crude oil’s discount to Brent also received some attention with domestic issues within the US being the main driver behind the current widening.

" Crude oil, led by Brent, has recovered some of the steep losses that followed the previous week’s announcement from Russia and Saudi Arabia that they were considering lifting production. This primarily came about to replace the involuntary loss of approximately 600,000 barrels/day from Venezuela and Angola since the current production cut deal was introduced at the beginning of 2016. In addition to Saudi Arabia and Russia, only Kuwait and the UAE are currently able to contribute with higher production and this could potentially see some intense discussions at the June 22 meeting in Vienna, not least from countries currently not able to increase production. Apart from 90 minutes on June 14 when Saudi Arabia and Russia’s finest football players meet at the opening game at the 2018 World Cup in Moscow, these two countries have played like one team since late 2015," Hansen said.

The recent decision to work towards increasing production came after the first signs of rising crude oil prices was beginning to potentially hurt demand, Hansen said.

"It was mentioned by the IEA in their monthly Oil Market Report for May where they expected to see a slowdown in global demand growth in the second half of 2018, largely due to higher oil prices. The negative demand growth impact of rising crude oil prices could potentially make it easier to “sell” the idea of raising production to the other members of the OPEC/non-OPEC when they all meet in Vienna on June 23. While crude oil could be settling into a range while we await the decision, the gulf between Brent and WTI crude continues to widen. The spread between the two global benchmarks now exceeds $11/barrel – the widest in more than three years," Hansen said.

According to the expert, increased US crude oil production, currently up year-on-year by 1.4 million barrels/day to a record 10.8 million, has resulted in key pipeline infrastructure running close to full capacity.

"In addition, export terminals along the Gulf coast are also challenged in shipping oil out fast enough. While these developments have yet to slow production growth, there is a risk that it could happen. Not least considering that relief from improved infrastructure through the construction of new pipelines is not going to arrive until sometime next year."

"The combination of WTI’s widening discount to Brent and the potential of increased supply is likely to keep the upside limited ahead of OPEC and non-OPEC meetings. Longer-term charts on Brent crude could indicate that the market potentially is settling into a $71/b to $81/b range. Although supply issues will continue to set most of the agenda, not least considering the so far unquantifiable impact of US sanctions on Iran’s ability to export, the impact on demand from slowing global growth momentum cannot be ignored," the expert said.

Hansen noted that gold and silver both remained stuck around $1300/oz and $16.5/oz with the abovementioned news so far having a net neutral impact on the two metals.

"A small recovery in platinum, together with a record fund short, supported a third attempt to break the current downtrend while copper remains stuck in the range that has prevailed for more than six months now. Precious metals, led by gold, had another quiet and on balance disappointing week. Earlier support from rising political risks in Europe, global trade tensions, stock market weakness and lower bond yields all failed to catapult the metals higher with the dollar continuing to show signs of strength. The failure to break the 200-day moving average on gold at $1308/oz subsequently led to some renewed weakness ahead of the weekend," Hansen said.

Soft commodities provided some fireworks with drought in Texas and the impact of the first Atlantic storm of the season driving cotton to a four-year high before being capped by worries that a trade war with China could negatively impact US exports, said Hansen.

"The several months long rally in cocoa has run out of steam with speculative longs heading for the exit after concerns about tighter supplies from producers began to ease. The grain sector also retraced some of its recent strong gains with emerging global trade tensions potentially threatening exports. Mexico and China are the biggest buyers of US-produced corn and soybeans. Adverse (dry) weather around key growing regions from Australia to Russia, Europe, and not least the US is likely to provide some underlying support. Position adjustments from hedge funds holding the biggest seasonal net-long since 2014 are likely to provide plenty of volatility in the weeks ahead as they add and reduce positions in response to market developments," the expert said.