Crude oil prices have experienced a downtrend since early April, with Brent trading near a two-month low. This decline marks a retracement of half of the $20 rally that began in December. The latest Commodities Report from Ole Hansen, head of commodities strategy at Saxo Bank, states that the initial rally in oil prices was fueled by geopolitical tensions in the Red Sea and the Middle East, which raised concerns about potential disruptions to oil supplies from key producers in the Middle East. However, as the war persists and international efforts towards a ceasefire continue, the risk of supply disruption has diminished, contributing to the current downward pressure on prices.
Another factor fueling the current slump in oil prices is selling from hedge funds, many of which are exiting long positions that they entered during the earlier price rally, says Saxo Bank. Additionally, traders are engaging in fresh technical selling, seeking a downward extension following last week’s breakdown and subsequent drop below the 200-day moving average, currently at $84.42 per barrel.
Fundamentals and production cuts
The failure to maintain the $90 price level, which OPEC+ producers prefer, along with loosening fundamentals, suggests the possibility of an extension in oil output cuts. This situation could further erode market shares. However, Saxo Bank sees only a slight risk of Saudi Arabia and its allies defending their oil prices line below $75 per barrel.
Selling pressure from hedge funds, particularly in front-month contracts of WTI and Brent, has led to a significant decline in prompt spreads, supporting the narrative of weakening fundamentals. While speculative selling has played a role in shaping market sentiment and oil prices, key indicators such as time spreads and refining margins have also softened globally. Additionally, inventories have risen.
Read: Oil prices rise on mixed Chinese trade data, Middle East tensions
Demand outlook
Despite the current downtrend, Saxo Bank expects global demand growth for oil to exceed historical trends this year. Unless there are downgrades due to a surprise deterioration in global growth expectations, the bank expects Brent crude to return to trading closer to the $90 per barrel mark.
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