Ole Hansen, Head of Commodity Strategy / Saxo Bank
Following one of the biggest crude oil selloffs in recent memory the prices of both WTI crude and Brent crude have now remained range-bound for two months. While other financial markets have been preoccupied with the future of Greece and its potential impact on markets, an eerie calm has descended upon the oil market. Since recovering from a $42 low back in March, WTI crude oil has since established a tight range around $60/bbl. The average price during the past 41 trading days has been $59.65 and this level has been traded on all but 13 days during this period. A sideways trading pattern like this has been seen before but coming after a long period of extreme price moves, it has surprised many observers.
The upside potential seems limited to around $65 given the potential for a return or pick-up in US shale production at this level, the downside seems equally limited.
A breakthrough in the Iran nuclear negotiations currently approaching their June 30 deadline should lead to increased exports from this important Opec member. Speculation that 50 million barrels from floating storage could be unleashed on the market could initially have quite a negative impact on oil prices. Iran, however, is desperately short of investments to improve its production ability and this will take time to implement.
Over the coming months and into next year Opec is hoping that US production will continue to slow and that a continued rise in global demand eventually will allow the price to move higher as the risk of oversupply will fade despite the above mentioned pick-up in US production.
A continued bumpy ride for oil can therefore be expected and with the risk of rising supply, as refinery demand slows, towards the end of the current quarter the upside potential seems limited, thereby skewing the short-term risk to the downside.
During the coming quarter we see Brent crude trade predominantly within a $55 to $70 range and WTI crude within $50 to $65 range with the downside risk most likely to be seen towards the end of this period unless an agreement with Iran is reached within the next couple of weeks.