Saxo Bank: Supply disruptions support oil, but resistance lurks

Oil&Gas Materials 16 May 2016 18:27
Oil prices will eventually recover, but uncertainty over rebalancing of the market will ensure the volatility over the coming months.
Saxo Bank: Supply disruptions support oil, but resistance lurks

Baku, Azerbaijan, May 16

By Aygun Badalova - Trend:

Oil prices will eventually recover, but uncertainty over rebalancing of the market will ensure the volatility over the coming months, Ole Hansen, head of commodity strategy at Saxo Bank believes.

"It was a mixed week for commodities with gains in energy and agriculture just about offsetting losses in precious and industrial metals. Overall, we have seen the sector settle into a range during the past three weeks as the strong gains seen during the first four months of this year have increasingly been difficult to replicate," Hansen told Trend on May 16.

The weakening dollar during the first four months of 2016 was undoubtedly an important driver, but not the only one behind the revival seen across commodities this year, according to Hansen. "The dollar's strength, however, was not enough to prevent crude oil having another attempt at breaking higher towards the key psychological level at $50 a barrel. Disruptions in Canada and Nigeria have temporarily removed a large chunk of supply," he said.

Hansen stressed that the impact of the burst bubble in Chinese-traded commodities such as iron ore and steel, combined with the concerns about demand prospects in China, hurt industrial metals.

Gold and silver remain well-supported despite the 20 percent-plus returns already achieved this year. Slow growth, fading US rate hike prospects, negative interest rates courtesy of central bank policies, and Chinese currency devaluations have been some of the major drivers, Hansen said.

"With most of the above drivers are not expected to disappear anytime soon, both institutional and retail investors continue to seek alternative investments such as gold. This "paper" demand has more than offset a slowdown in the more price- and growth-sensitive demand for jewelry," he added.

He also said that gold and silver did, however, retrace lower this week as the dollar recovered but the uptrend remains firm and so far any setback has been met by additional buying. Gold has established a wide $1,225 to $1,310/oz range with some support found at $1,257/oz.

Additional dollar strength may provide some headwinds but against this we have the June Brexit vote and stock market wobbles creating enough uncertainty to expect continued support, according to Hansen.

Multiple supply disruptions supporting crude oil

Both the Brent and WTI variants of crude made a renewed attempt to break higher this past week. Global supply disruptions and robust demand have helped support the strong surge seen since the early 2016 lows, Hansen said.

He stressed that the latest supply disruptions from Venezuela and Canada to Nigeria have removed a sizable chunk of the current daily oversupply. These developments, combined with the first seasonal inventory draw in the US and a bullish assessment on global demand from the IEA, all helped support prices which increasingly had been showing signs of fading positive momentum, according to Hansen.

"After creating a double-top on the charts, both oils retraced some of the weekly gains Friday.

Crude oil maintains a strong correlation to the dollar and the dollar strength seen on Friday - along with reports that Opec production reached a new multi-year high during April - helped attract some profit-taking," Hansen said.

While OPEC continues to increase production - mostly due to Iran - it is increasingly dependent on supply reductions elsewhere to support current price levels, he said.

The slowdown in US production remains price-sensitive and as WTI crude oil (for calendar 2017) trades within a whisker of $50 a barrel, the potential for a fading production slowdown would upset current expectations of when the market will rebalance, Hansen said.

Saxo bank maintain our view that the rebalancing process currently underway remains very price-sensitive. It is primarily being supported by the involuntary slowdown in non-OPEC (read US shale oil) production together with multiple and mostly temporary supply disruptions.

"While we may see a pop towards $50 a barrel during the current quarter, the risk increasingly remains skewed to the downside. US inventories have begun their annual decline and during the coming weeks additional reductions will be supported by reduced imports from Canada as they slowly return to full capacity following the wildfires," hansen said.

With inventory growth now slowing, the focus will turn to refineries and strength of their demand for crude to refine. Implied gasoline demand remains a healthy 325,000 barrels above last year but against this we have inventories sitting some 14 million barrels above (and refinery margins some 15% lower than) this time last year, he added.

WTI crude oil is currently trading within a $43 to $47 a barrel range while for Brent crude it is $43.5 to $48 a barrel. A bumpy road ahead is the only guarantee oil markets can provide at this stage.

"Oil prices will eventually recover in order to attract renewed investments and drilling activity. For now, the timing of when supply and demand finally cross remains the big unknown and one that will ensure plenty of volatility over the coming months," Hansen said.