Commodity Weekly: Bullish gold argument continues to strengthen

Crude oil challenged by continued loss of risk appetite

The banking crisis that has roiled financial markets this month has particularly impacted the energy sector, with WTI and Brent crude oil trading down by more than 10% while natural gas lost close to 20%. Crude oil’s dramatic response to the liquidity crisis has, to a large extend, been driven by developments in the weeks prior to the collapse of Silicon Valley Bank. During this time, months of range bound trading had lowered volatility, thereby supporting bigger risk taking, and with the forward curves in backwardation – supportive for those holding long positions especially in Brent – speculators had been accumulating longs while cutting short positions.

As the crisis emerged, crude oil broke support and that opened the floodgates to selling, not only from the long liquidation but also from fresh short selling attempts. In the week to March 14, speculators sold a combined 117,000 contracts of crude oil futures, the equivalent of 117 million barrels, and making it one of the three biggest weekly reductions since 2017. The prospect for higher crude oil prices has not died a sudden death but, as the IEA wrote in their latest Oil Market Report, the oil market is currently caught in the cross currents with supply outstripping still-lacklustre demand and driving inventories to an 18-month high.

We note that the price supportive backwardation in Brent was maintained during the March sell-off while refinery margins have widened, both highlighting market conditions that if maintained will continue to provide underlying support. Overall, however, there is no doubt that the coming months are likely to be challenging, with the focus on financial market stability offsetting underlying strength in demand from China and a potentially weaker dollar supporting the growth outlook in emerging market economies. 

The weekly WTI crude oil chart shows how the market continues to challenge the 200-week moving average, currently at $66.25, with a close below this potentially signalling additional weakness towards the technically important $62 area. The US government is looking for ways to refill its strategic reserves, a task that earlier this week was said could not be done this year. However, a deeper correction below $70, the level mentioned as the maximum the government is prepared to pay, could see some support emerge, not only from SPR buying but also OPEC+ getting increasingly uncomfortable with the weakness, which they do not see as warranted given the current supply and demand outlook.

The weekly WTI crude oil chart shows how the market continues to challenge the 200-week moving average, currently at $66.25, with a close below this potentially signalling additional weakness towards the technically important $62 area. The US government is looking for ways to refill its strategic reserves, a task that earlier this week was said could not be done this year. However, a deeper correction below $70, the level mentioned as the maximum the government is prepared to pay, could see some support emerge, not only from SPR buying but also OPEC+ getting increasingly uncomfortable with the weakness, which they do not see as warranted given the current supply and demand outlook.