Oil prices – five signs the tide is turning in Q3

Thina Saltvedt

  • US/EU sanctions against Iran take effect on 28June/1 July
  • Seasonal demand pick-up in Q3
  • Iran/West negotiation on the verge of collapse
  • OPEC reserve capacity still disturbingly low
  • Euro area – small steps in the right direction will gradually improve risk appetite>

Oil price plunged in Q2 

Oil prices have plunged by 30% since the end of March. But we see several signs suggesting a new recovery in prices in Q3.

Several events have triggered the sharp oil price decline. In March Iran and the West decided to resume the discussions on Iran’s nuclear programme after the negotiations collapsed in January last year. This eliminated the political risk premium that had lifted oil prices by around USD 10/barrel in Q1.

In Q2 the crisis in Europe was the overwhelmingly dominant factor driving developments in most markets, and the oil market was no exception. Fears over what a break-up of the euro might mean triggered a massive flight among financial investors from risky asset classes such as oil into safe havens like the US dollar. This helped to accelerate the oil price decline.

Adding to the growing worries over the Euro zone, the US and China, the world’s two largest oil consumers, have shown signs of weakening economic growth. In this environment market participants have recently scaled down their oil demand growth forecasts for 2012 significantly. At the same time Saudi Arabia, the world’s largest oil exporter, has pumped record-high volumes of oil into the market. This contributed to a significantly softer supply/demand balance for Q2.

Source: Reuters Ecowin

Signs the tide is turning in Q3

Nonetheless, we see several drivers that could lift oil prices back above USD 100/barrel in Q3. In seasonal terms Q3 is the peak period of the year for oil demand, pushed up by the US driving season and increased energy consumption to keep air conditioning systems running in warmer regions. In addition, the US and China have introduced new measures to stimulate growth; these measures are expected to have a positive impact on oil demand.

Obviously there is a high risk that the euro may collapse, in turn pushing the world economy into a new decline. Such a scenario could trigger a new plunge in oil prices.

Despite this, we expect a last-minute solution for the crisis-hit countries that will gradually calm the market, boost risk appetite and attract investors back to the oil market.

The negotiations between Iran and the West are on the verge of collapse. A new collapse could lift risk premiums sharply, as many fear that Israel will resort to military action against the nuclear facilities in Iran. As the talks have so far not produced any results, the US sanctions and the EU embargo against imports of Iranian oil/insurance ban on vessels carrying Iranian oil will take effect on 28 June and 1 July respectively. This could cut Iranian oil sales by over 1m barrels/day in Q3.

Despite a ramp-up of oil production in North America (shale oil, oil sands and offshore production in the Gulf of Mexico) over the past year, the market has limited options for replacing additional losses of production. As a result of Saudi Arabia’s sharp production increase, the world’s safety buffer – OPEC’s reserve capacity – has dropped to very low levels. A protracted strike in the North Sea could further erode this buffer.

We may thus see a rapid recovery in oil prices when worries over the euro crisis gradually abate and the oil market refocuses on the supply side.

Money managers' net positions Vs WTI price

Source: Bloomberg, CFTC data

Thina Margrethe Saltvedt



Latest research

Swedish Morning Briefing - Thursday 17 April

• Separatists in Donetsk plan for a local referendum • A summit in Geneva to discuss the crisis in Ukraine

FI Eye-Opener: Easter bunnies to boost bonds today

Yields edged higher yesterday – long positions with potential today. Equities rebound, but more weakness likely ahead. Euro-zone core inflation back to record-lows. Italy taps retail investors for huge amounts again. Big US banks boosting their lending to companies – Euro-zone doing much worse. Philly Fed, jobless claims and LTRO repayment announcement. New French 2-year benchmark and US auctions ahead.

US Rates - Market in doubt

• It has been a bumpy ride for US rates in 2014. A two month rally started the year and recently the Fed has added substantial volatility with their somewhat wobbly way of commenting on future policy. • Further, the last NFP on April 4th was quite a disappointment. • In this note we look into the market perception (through futures and options) of all this, and in particular find indications towards a loss of faith (on rising rates) on behalf of the option market.

Swedish Morning Briefing - Wednesday 16 April

• Putin urges UN to condemn Ukraine’s intervention • Chinese growth at weakest level for six quarters

FI Eye-Opener: No support can survive constant pounding

German 10-year yield finally broke important support – mood remains bullish. A correction higher in yields still looks likely today. US equities recover after early losses. Q1 effect hits Chinese GDP numbers again. Ukraine’s military starting to use force US core inflation bottomed out? Euro-zone inflation and US housing market data ahead – Germany to sell 10-year bonds.

China: The impossible duality

China’s Q1 GDP growth of 7.4% was marginally higher than market consensus. It was caused by a combination of cyclical slowdown and structural shift away from the traditional growth drivers. Beijing is likely to continue the fine-tuning policies and stays away from large-scaled stimulus.

Euro Rates Update

The latest Euro Rates Update is now available

Swedish Morning Briefing - Tuesday 15 April

• Obama warns Putin • Ukraine raises policy rate

Competitiveness of the Nordics

Financial crisis and subsequent Euro crisis have cast doubts on the future prosperity of the Nordic countries. This report takes a closer look at the competitive position of the Nordics over past ten years and aims at answering how worried these countriesshould be.

FI Eye-Opener: Still going lower

Bond yields rebound, but bonds with more performance potential left. Intra-Euro-zone spreads narrow. Equities rise – more downside potential in the near term. US retail sales beat expectations. Eyes on US CPI and Yellen’s speech.

EM FX: Ukraine takes the headlines again

The Ukrainian President's deadline for rebels occupying state buildings in Eastern Ukraine to lay down their weapons have passed. Markets are awaiting news. EM FX is slightly weaker this morning, especially the RUB, the PLN and the TRY, but it seems that markets are becoming more resilient to headline news from Ukraine.

Swedish Morning Briefing - Monday 14 April

• Brighter outlook for global growth • Swedish finance minister worried about inflation

FI Eye-Opener: Please stop strengthening, we are asking nicely

Bonds with more gains on Friday – German 10-year yield to break lower today. Finnish bonds feeling some pressure after a negative outlook by S&P. Correction lower in equities has further to run. ECB fights the stronger currency with words – and talks further about QE. LTRO payments continue coming in – ECB more concerned about the rising euro. US retail sales & inflation, Chinese GDP and corporate earnings ahead. New French 2-year benchmark out this week.

Week Ahead: 12 - 25 April 2014

We cover two weeks in this Easter edition of Week Ahead. Important data prints from China, US inflation, PMI's, German Ifo and more...

Global FX Strategy: QE-nomics

Despite the QE-rumours, we still believe that the EUR has some upside left versus the USD short term. Find out why in this edition of our flagship FX publication, alongside views on NOK, SEK, JPY, AUD, CAD, NZD and Emerging Markets currencies. Enjoy!

European FI Strategy: Mad about QE

Euro zone QE talks all over the place, but there is still room for curve flattening and demand continues to be strong, also for Scandies. Find out what we favor in this month's edition of European FI Strategy.

Swedish Morning Briefing - Friday 11 April

• Finland – S&P affirms AAA but lowers outlook to negative • Nasdaq sees largest decline since November 2011

Finland: King of ratings no more

The credit rating agency Standard & Poor’s surprisingly changed its outlook for the AAA rating of Finland from stable to negative, the first major rating agency to do so. The action puts more pressure on the already shaky government and will deliver a hit to Finnish bonds, very dependent on the highest ratings.

FI Eye-Opener: Bye, bye, Finnish AAA?

Bonds with a big rally yesterday – curves bull-flatten. German 10-year yield gathering momentum to break lower – a correction higher in yields still likely today. Finnish credit rating starting to feel pressure – more pressure for the shaky government. Huge demand for the new Greek benchmark. US consumer confidence and IMF Spring meetings ahead. Italian auctions concluding a busy supply week.

Northern Lights: Goldilocks?

Following this morning’s CPI figures, the Riksbank is widely expected to cut rates. But how can you trade SEK and Swedish Rates in this environment? Find out more on that, alongside updated views from our macroeconomists and strategists across the Nordic region. Northern Light gives you everything you need on Scandinavian Macro, FX and Fixed Income. Enjoy!