FxWirePro: A Run Through on Energy Commodities Projections and Trades Recommendations

The commodities baskets were weaker across the board as uncertainty over the US-China trade deal hurt risk sentiment. Industrial metals posted a 4% loss this week while the energy complex was down 2.3%. 

Crude oil has seen significant intra-day volatility in the recent past as mixed news on the trade front and conflicting statements from OPEC kept the market on edge. The oil producer group appears to be discounting the possibility of deeper output cuts, signaling better compliance could be enough to reduce the supply surplus expected next year. OPEC chief Barkindo also highlighted that an improving macro outlook could bolster oil demand next year and noted comments made by some US oil producers on slowing output growth.

In their latest market outlook, OPEC marginally trimmed their US supply growth forecasts and said they saw 0.65 mbd of stock builds in 1H’20. This is slightly below our strategists’ expectations for an approx. build of 0.75 mbd during 1H’20.

Meanwhile, the EIA raised their US crude oil supply forecast for 2020 and also reported greater than expected build in crude inventories and higher oil production. The IEA affirmed its existing fore- casts for demand but also raised 2020 non-OPEC supply forecasts slightly. Today, Brent is edging higher 0.28% to just under $64/bbl, while WTI is up marginally by 0.07% to $58.30/bbl. We continue to see tighter physical oil markets in the near-term and view stronger OPEC compliance and slowing US supply growth as constructive for oil. They took profits on part of their long Jan’20 ICE Brent position citing heightened volatility in the run up to the OPEC+ meeting on 5-6 December.

Trade recommendations: Longs in ICE Brent Jan’20 contract are advocated on supportive near-term fundamentals although they have taken partial profits on the trade. The longs in ICE gasoil Jan’20 and short ICE gasoil Feb’20 spread trade should be squared-off. Courtesy: JPM