Crude oil’s steady ascent since December, when Houthi attacks on ships in the Red Sea, has recently met with resistance, as WTI failed to break above $80 resistance, while Brent’s upside move was arrested well ahead of key resistance at $85.
Initially, the attacks raised the geopolitical temperature while supporting tighter supply conditions with millions of barrels of crude and fuel stuck at sea for longer. But the trend is showing signs of running out of steam.
“While a recent buildup in hedge funds’ long positioning and the current price behaviour support an upside break, we stay sceptical given the lack of a clear catalyst to trigger such a move,” Ole Hansen, head of commodities strategy, Saxo Bank, wrote in a note.
The impact of the crude markets’ inability to break higher, or lower for that matter, can be seen in the narrowing trading ranges, with the four-week rolling trading range in Brent and WTI both falling to a ten-year low with a range in WTI this past month of $5.3 and just $4.2 in Brent. “While the geopolitical temperature has increased by a few degrees since December, we have yet to experience any disruptions, and the market has concluded that such a risk is currently very low,” Olsen says.
The prices are still getting support from member of the Organisation of Petroleum Exporting Countries and their allies, collectively known as Opec+, extending their voluntary output cuts. Without Opec+ supporting prices through supply cutbacks – which on paper total roughly 2 million barrels per day – Brent crude would most likely have traded in the low $70s or perhaps even lower, Saxo Bank extimates. So, while the efforts have not yielded higher prices, many of the producers need to balance their budgets, prices have held steady and high enough to ensure robust production growth from non-Opec+ members. The market is also taking into account production in the US, which, according to EIA’s latest short-term energy outlook, could see output accelerate to a record 13.65 million barrels per day (bpd) in 2025 from 13.19 million bpd this year.
Oil prices rose about 2 per cent to a four-month high on Wednesday on a surprise withdrawal in US crude inventories, a bigger-than-expected drop in US gasoline stocks and potential supply disruptions after Ukrainian attacks on Russian refineries. Brent futures rose $1.97, or 2.4 per cent, to $83.89 a barrel by 1703 GMT, while US West Texas Intermediate (WTI) crude rose $2.07, or 2.7 per cent, to $79.63, Reuters reported.
Before then the market had slipped after Opec in their latest monthly update wrote supply cuts had stalled as Iraq for a second month produced around 200k barrels/day above its quota.
At this time of year, US crude stocks tend to rise while fuel stocks drop amid lower refinery activity during the annual maintenance season. Stock levels of all three trail their five-year averages, not least distillates or diesel inventories which have fallen for seven straight weeks, hitting the lowest level since December.
Managed money accounts, such as hedge funds and CTA’s, have been a main source of price support in recent months with net buying since December 15 driving up the combined net long by 250,000 futures contracts (250 million barrels) to 421,000, and while the initial buying was concentrated in Brent amid supply disruption risks, WTI has been the main recipient during the past month. However, with the upside momentum now showing signs of stalling buying support may stall as well, leaving both crude contracts exposed to long liquidation should prices turn lower.
“For now, as mentioned we see no catalysts on the short-term horizon strong enough to force a change, with day traders focusing on rangebound trading strategies instead of looking for breakouts to drive fresh momentum,” Olsen said.