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Edward Bell - Commodity Analyst
Published Date: 26 January 2020
Oil prices continued their steady drift lower last week as demand concerns increase on fears the coronavirus outbreak will threaten China’s economy, particularly affecting segments that would boost demand for jet and gasoline. Brent futures closed 6.4% lower on the week at USD 60.69/b while WTI gave up 7.4% to settle at USD 54.19/b. Brent has now lost more than 8% year-to-date while WTI is down nearly 11% before even the end of January. For reference our forecasts for average prices in Q1 is Brent at USD 58/b and WTI at USD 55/b. While average prices so far are still above our targets, they are converging consistently as weaker fundamentals drag prices lower.
Anxiety over supplies being affected by geopolitical risk in Libya and Iraq were surmounted by demand fears over the course of the last week. Political risk has sparked one-off moves in oil prices so far this but has failed to support prices at sustained high levels.
The weakness in energy prices is not confined to crude oil. Gasoline and gasoil futures fell sharply last week while natural gas prices across Henry Hub, National Balancing Point and LNG all recorded declines. EU emissions futures also slipped. While part of a broader move downward in commodities—the GSCI index gave up 4.8%—last week, the decline in energy prices reflects heavy supply conditions in virtually all markets.
Market structures for crude benchmarks stabilized around recent levels at the front end of the curve. Brent spreads for 1-2 month settled in a backwardation of USD 0.8/b while WTI spreads ended the week at nearly neutral. However, long-dated spreads showed significant weakening as December spreads in both Brent and WTI fell sharply. Options market skew is displaying a widening put premium (25 delta risk reversal strategy) but not at particularly wide levels yet.
Investors continued to add long positions in both Brent and WTI with net length in Brent rising by 2.8k contracts and almost 6.4k in WTI. Brent net long speculative positions have widened for the past seven weeks in a row and for 13 of the last 14. This has helped to push the long-short ratio to more than 7 and speculative positioning to 13.5% of total open interest. With a retouch of USD 70/b looking difficult in the near term and market conditions continuing to sag investors may be getting itchy to pull out of Brent positions, risking a disorderly sell-off.
Source: Bloomberg, Emirates NBD Research.
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