Commodities Weekly

Making sense of the OPEC+ oil production cut – bullish or bearish?

 

Global commodities

Saudi Arabia has set up a make-or-break H2 2023 for oil markets after committing to a large supply cut (its third since October 2022) last weekend (see here). The latest reduction in output of 1m b/d for July deliveries (potentially extended), will bring the Kingdom’s production to ~9m b/d – the lowest level outside of COVID and the immediate aftermath of the 2019 infrastructure attacks – in more than a decade. The Saudis are trying to wrench global oil inventories lower to buoy prices, although previous supply reductions have not done the job. While the physical market should tighten materially in H2 2023, the sticking point remains paper oil markets with short sellers continuing to amass positions betting on oil to slump (see here). It’s a clear sign that investors remain laser focused on iffy global macro conditions, which Saudi Arabia (and broader OPEC+) can do little to overcome. As the Fed begins to signal the start of its easing cycle, the physical market tightness is set to spread into the world of paper market contracts, flushing out speculators and propelling oil prices higher (see here). Until then, the Saudi energy minister’s “whatever is necessary” (Draghi-like) rhetoric could prove expensive if the Kingdom finds itself stuck with lower volumes and lower prices.

 

Energy

The global oil market is gripped by a test of wills. Oil prices have pared back all the initial gains since the latest OPEC+ announcement, with renewed softness showing investor’s considerable scepticism that Saudi Arabia’s unilateral production cut can stem the slide. Looking ahead, our conviction is that the group’s greater-than-historical pricing power offers the space for it to deliver additional cuts in H2 2023 should Brent oil prices fall persistently below our OPEC+ put of USD75/b (see here).

 

Base metals

While China’s copper demand is significantly outperforming the aggregate growth trend onshore, that is not yet converting into a clear-cut bullish micro trend due to the subdued import channel, coupled with weaker ex-China demand trends. Assuming no further growth shocks, the direction of travel is towards an eventually more supportive aggregate micro environment, but on current trends that may take until the end of summer to come to fruition. This signals in our view that in the near-term, copper will remain in a troughing phase hovering just north of USD8,000/MT.

 

Precious metals

Gold is holding steady~USD1,950/oz, with investors weighing the outlook for more Fed rate hikes against the follow-through consequences of the US debt-ceiling deal for Treasury issuances and yields. As we have regularly catalogued, gold is one of our favourite commodities to be long, as we are now past Fed peak hawkishness, alongside continued purchases of gold from EM central banks (see here and here).

 

Bulk commodities

Iron ore is pushing higher in recent trading days amid speculation that China’s policymakers will be more assertive in supporting growth, especially in the ailing property sector. Yet, we continue to believe that burgeoning global supplies will undermine the rebound and drag prices back down (see here).

 

Agriculture

Wheat remains volatile as traders assess the implications of the escalation of heightened tensions in Ukraine, the destruction of the Kakhovka dam the weather outlook for major growing areas. On net, we believe the next leg on prices will be higher on tightening supplies but acknowledge fundamentals point to abundant supplies.

 

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.

 

 

CHART OF THE WEEK: SHORT SELLERS KEY IN DRIVING OIL PRICES LOWER