Six reasons why oil could break out of the recent tight trading range

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Six reasons why oil could break out of the recent tight trading range

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Market view oil: Moving to a new higher trading range

Six reasons why we see upside for oil in Q2 and Q3

Market view gas, power and EUA: We might have seen the lows for now
Market Drivers next week: Oil market reports
Hedging views: Attractive backwardation in oil for consumers

Oil: Add to consumer hedges on dips below USD80 in Brent
EUA, gas and power: Scale into consumer hedges

We believe that the Brent oil price is about to break out of its recent trading range of USD USD 81 to USD 84 and to establish a higher range around USD 83-88 for the coming quarters. Hence, we are “buying on dips” for a break of the trading range.

Six reasons why we see upside for oil in Q2 and Q3

We believe Brent has some upside from the current level heading into Q2. We see the following six reasons for higher oil prices:

OPEC+ commitment: OPEC+ showed with the extension of the 2.2 mb/d voluntary cut into Q2 announcement last weekend that the cartel is ready to defend Brent from falling below USD 80/bbl. The cuts will be at the expense of market share. However, it seems that OPEC+ is ready to accept this cost.

Seasonal demand support: Oil demand typically picks up in Q2 as the refineries tep up the run from the maintenance in Q1 and as economic activity picks up in the spring. Notably, this year, we have seen a lower-than-normal refinery utilisation rate in the US in January and February, well below the rate in 2022 and 2023. When refineries return to a higher utilisation rate over the coming weeks, we will see increased crude oil demand and a draw on US crude oil inventories after the recent build. Even though the market should be aware of this effect, we expect lower crude oil inventories to be seen as a sign of underlying demand growth.

Global manufacturing recovery: We also see signs that the global manufacturing cycle is improving slowly. Hence, the demand for fossil fuels in manufacturing will improve. China of course remain a risk on the downside. But a well-known risk for the market. If anything, China could surprise on the upside if the amount of stimuli is stepped in the wake of the somewhat optimistic new 5% growth target for 2024.

OPEC to produce below call-on OPEC: The combination of OPEC+ keeping production low and the seasonal pick up in demand implies that OPEC will most likely be producing below call-on-OPEC (the amount of oil OPEC needs to produce to secture a stable inventory situation). The chart below to the right shows call-on-OPEC according to IEA. If OPEC keeps production around the current level around 26.6 mb/d the result should be a tighter market, notably in Q3.

Investor demand: We expect investment funds and other speculative accounts to add to long positions in oil and oil products over the coming months. The backwardation in the oil curve and the lower volatility make it attractive for speculative accounts to be long oil in a situation with more robust fundamentals. The weaker US dollar, with EUR/USD close to a year-high, also supports higher oil prices.

Geopolitics: Finally, geopolitics have moved in the background. However, it seems that no solution is in sight for the war in Gaza, which also implies that the attacks by the Houthis in the Red Sea will continue. We see little risk that the war will spread into a wider conflict, but it cannot wholly be ruled out. Hence, we should continue to have a small geopolitical risk premium in the oil price.

Based on the factors above, we believe Brent will soon break out of the recent trading range and move to a new USD 83-88 range.

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