Crude oil prices are struggling again, and the step back is somewhat surprising after multiple OPEC production cuts.
Today’s weaker China trade data may have caused a head fake on the oil market. Among major categories, the import value of commodities such as soybean and crude oil rose sharply sequentially, primarily driven by increasing volumes. Hence beneath the surface, the data still points to solid oil demand, just not the extra 2 million needed to fulfil the bullish prophecy.
And while the trade figures further enhance the view that China’s GDP is facing a sequential slowdown. But on a positive note, this supports the case for a more pervasive monetary policy stimulus.
Still, the problem for oil markets is not demand but visible supply that encourages downward price pressure. At the root of the matter was April’s ineffective production cut that did little more than open the door for Russia to capture an increasing share of the pie by sending more barrels to Asia destination
Investors’ recession priors suggest the US will run into trouble meeting official growth targets. Still, if we are now forced to add China to that list, the path of least resistance for oil could remain lower. And from a compliant perspective, it’s unlikely OPEC will run back to the production cuts well.
Still, with traders not sure which way is up, over the very near term, the Brent $75 bbl level, widely acknowledged as the Saudi line in the sand, could still be a good entry point given the Saudi intervention flexibility.
There is massive speculative pressure to the downside, with visible Brent positioning at its most short since 2020, and WTI positioning is the least long in 11 years. If demand disappoints, Saudi Arabia could extend its -1 mmb/d cut keeping global inventories lean. On the other hand, if demand were to be bolstered by China, fulfilling expectations of +2 mmb/d global growth, then balances would likely tighten of their own accord, and speculative positioning would revert, allowing Saudi Arabia to reverse its temporary cut without any damage to its credibility.
