Saxo Bank: Understanding crude oil dynamics as 2024 gets underway

Non-OPEC+ supply and demand concerns offset OPEC+ cuts, Mideast tensions
Saxo Bank: Understanding crude oil dynamics as 2024 gets underway
Crude oil is likely to remain rangebound around $80 in Brent during the coming quarter

Crude oil traders have started the year cautiously with global growth and demand worries offsetting rising geopolitical risks. In addition, attacks on commercial ships have forced shippers to reroute cargoes from the Middle East and Asia. This has led to higher costs and increased journey times.

Bear in mind that the first few weeks of trading will likely, just like other years, trigger some volatile trading. This is due to trigger happy speculators looking for trading signals, in the process creating choppy trading conditions.

Hence, we see an increased likelihood of crude oil staying rangebound in the coming months. No single trigger will be strong enough to change the dynamics of a market that has divided its focus between growth worries, not least in China and the USA, as well as rising non-OPEC+ production on one hand and OPEC+ cuts and geopolitical risks on the other.

Brent crude oil

On top of this, we may see risk appetite vary depending on the expected pace of U.S. rate cuts. With that in mind, we see Brent crude oil remain rangebound around $80 per barrel during the first quarter. The biggest risk to the downside is a disunited OPEC+ that could lead to a collapse in the current agreement. Meanwhile, upside risk is a major geopolitical event disrupting the flow of crude oil and gas from the Middle East.

Brent spent last year trading in a relatively small 27.5-dollar range compared with the 64-dollar range seen in 2022. This was when the war in Ukraine drove the market sharply higher, before collapsing. Overall, the front month futures contract in Brent ended 6 percent lower on the year. Meanwhile, the U.S. West Texas Intermediate (WTI) was 7 percent lower. From an investor’s perspective both futures contracts traded in backwardation through most of the year. Given the positive impact on rolling contracts in such an environment, the negative result was reduced to -1 percent in Brent and -2 percent in WTI.

Read: Brent, WTI oil prices ease on Chinese economic concerns

Pricing and OPEC+

At the current price near $80, Brent trades just a couple of bucks below last year’s average price. The current 200-day moving average is just above $82. The relatively small range can be credited to OPEC+ and its attempt to maintain stable prices through actively managing supply. However, there is no doubt that the group would have liked to see prices higher. But rising production from the U.S., Iran, Venezuela, Guyana and others, together with Q4 demand weakness, left the group with only with a half victory given the failure to boost prices while surrendering market share.

Being forced to surrender additional market share in order to keep prices supported above $70 remain a key risk to the unity of the group, not least given the prospect of weaker demand growth and continued robust production from non-OPEC+ nations putting downward pressure on OPEC+ market share and upward pressure on available spare capacity, not least from Saudi Arabia which holds more than 3 million barrels per day of spare capacity, a development that in normal times should help curb any price rally given the strong incentive to bring more oil back to the market.

Speculators such as hedge funds and CTAs will continue to play an important role in setting highs and lows in the market. These momentum following trading strategies tend to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. However, this strategy often sees this group of traders buy into strength and sell into weakness. This means that they are often found holding the biggest long near the peak of a cycle. The alternative is holding the biggest short position ahead of a through in the market.

U.S. rate cuts to add volatility

Last year’s rangebound trading behavior was a constant challenge for momentum following speculators, leading to several situations where they ended up holding the wrong position when Brent and WTI instead of continuing a trend, suddenly reversed as the technical outlook changed, driven among others by OPEC+ production decisions, US rate cut expectations, China developments and geopolitical events. From a 491-million-barrel net long in February to a 231-million-barrel low in June before reaching a two-year high in September at 560 million, only to collapse to an 11-year low at 171 million at the beginning of December, before Red Sea disruptions helped support a strong two-week rebound ahead of yearend.

Crude oil is likely to remain rangebound around $80 in Brent during the coming quarter as non-OPEC+ supply and global growth concerns offset production cuts, Middle East tensions and another rise in global demand, albeit at a slower pace than last year. The OPEC+ group of producers will continue to support prices by extending and potentially deepening the current production cuts, in the process yielding market share while adding to the level of available spare capacity. The timing of the first and the subsequent pace of US rate cuts will add volatility to the market from macro-focused speculators.

Crude oil
Ole Hansen, head of commodity strategy, Saxo Bank

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