Oil consolidated after hitting a seven-year high
The commodity sector traded higher for a fifth week with the Bloomberg Commodity Index trading near the seven-year reached last October. Gains were driven by industrial metals with the LMEX Index hitting a record, driven by Chinese stimulus and falling global inventories. Oil consolidated after hitting a seven-year high while precious metals continued to surprise the market with surging silver and platinum supporting gold which reached a two-month high.
The energy sector traded mixed with crude oil extending its weekly run of gains to five, but after hitting a fresh seven-year high, some profit-taking and consolidation started to emerge which potentially could trigger a near-term and long-overdue correction. However, with underlying fundamentals being as strong as they are, the risk of a major setback seems limited. Natural gas meanwhile slumped on either side of the Atlantic on mild weather developments in the USA and strong LNG arrivals in Europe offsetting the price spike risk associated with Russia’s aggressive behavior along the Ukraine border.
Global oil demand is not expected to peak anytime soon and that will add further pressure to available spare capacity, which is already being reduced monthly, thereby raising the risk of even higher prices. This supports our long-term bullish view on the oil market as it will be facing years of under investment with oil majors diverging some of their already-reduced capital expenditures towards low-carbon energy production.
In the short term, as mentioned, the market needs to consolidate its recent strong gains, and with that in mind the risk of a small setback has emerged. Brent crude – as well as WTI – has several support levels to choose from, with the first at $85.50 followed by $83, ahead of the first major support at $81.80, the 38.2% retracement of the latest surge higher. An unlikely setback of this magnitude will likely be taken as an opportunity to accumulate fresh long positions.
Crude oil’s month-long rally showed signs of slowing after Brent crude oil found resistance ahead of the key $90-dollar a barrel price, and after US crude oil inventories rose for the first time in eight weeks and the White House talked up the prospect of accelerating releases from its strategic reserves. The market, however, remains very tight with supply struggling to keep up a demand that has seen a limited impact from surging Omicron cases around the world.
The market is in particular worried that the OPEC+ group, despite signaling higher output, will struggle to meet those targets. For several months now we have seen overcompliance from the group as the 400,000 barrels per day of monthly increases was not met, especially due to problems in Nigeria and Angola. However, more recently production challenges have seen several other countries, including Russia, fall short of their targets.
The rising gap between OPEC+ crude oil quotas and actual production has been the main driver and with the outlook pointing towards rising demand and falling spare capacity, the risk of reaching 100-dollar barrel oil later in the year continues to grow. A risk that was highlighted by the IEA in their latest Oil Market Report for January. In it the group said the market looked tighter than previously thought, with demand proving resilient to omicron.
Read full Analysis: WCU: Precious metals defying rising real yields. By Ole Hansen, Head of Commodity Strategy, Saxo Bank
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