1. Fed minutes highlight internal divisions
The minutes of the Fed meeting showed that officials were divided on the pause in raising interest rates in June, with some participants saying that further policy tightening may be needed at future meetings. Officials agreed that inflation was too high and falling more slowly than expected, stressing that it was data-dependent and that a rate cut was unlikely. In addition, the Federal Reserve urged lawmakers to raise the debt ceiling in time to avoid chaos in the financial system and the overall economy.
2. U.S. debt ceiling issue update
On Wednesday local time, the White House and Republican negotiators renegotiated on the debt ceiling. House Speaker McCarthy later said that the situation had made slight progress but there were still differences, and an agreement in principle could be reached over the weekend.
Despite this, the market’s worries have further heated up. Fitch put the “AAA” rating of the United States on the negative watch list and may downgrade the AAA rating of the United States, but still said that the probability of default is very low.
U.S. Treasury Secretary Yellen reiterated that the Treasury Department may run out of cash by June 1, the department is committed to pushing for a deal, and is not preparing for the time of default. She will testify before the committee on June 7, after conservative Republicans publicly questioned June 1 as debt ceiling X Day.
The U.S. Treasury’s cash balance rose $8.2 billion to $76.5 billion on May 23, the third straight day of increases, easing some concerns over the debt-ceiling impasse and the risk of government default.
3. EIA crude oil inventories in the United States fell sharply by 12.456 million barrels in the week to May 19, the largest drop since November 2022. It is expected to increase by 775,000 barrels, compared with an increase of 5.04 million barrels in the previous value.
4. According to Interfax, Russian regulators said they were ready to support (Russian) restrictions on V gasoline exports.
5. Canada and Saudi Arabia will appoint and exchange new ambassadors. It shows that the two countries have agreed to fully restore diplomatic relations after a five-year hiatus.
6. According to the Financial Times, the European Union is discussing a plan to transfer profits from frozen 196.6 billion euros of Russian assets to Ukraine.
Oil prices continued to rise yesterday, and cloth oil easily returned to above $78/barrel. Earlier in the week, Saudi Arabia’s energy minister warned short sellers to be “careful,” boosting markets. As we have noted before, there are plenty of speculative shorts in the market who may be hesitant to take too much risk ahead of the OPEC+ meeting on June 4th. That possibility is all the more likely after the energy minister issued a warning. Given that the market will tighten in the second half of this year, from a fundamental point of view, we do not think OPEC+ needs to cut production further. However, these remarks by the Saudi energy minister may have increased market expectations that OPEC+ may further cut production. Therefore, if OPEC+ does nothing by then, oil prices may face some short-term losses.
Beyond that, inventory data released this week also played a constructive role in the market. API data released earlier this week showed that U.S. crude and refined product inventories both fell sharply last week. The more widely watched U.S. EIA inventory data released yesterday was more upbeat. U.S. commercial crude inventories fell by 12.46 million barrels, the largest weekly drop since November last year. Gasoline and distillate inventories fell by 2.05 million barrels and 561,000 barrels, respectively. Implied demand also rose by 1.14 million bpd this week, driven by gasoline and distillates, with demand rising by 529,000 bpd and 462,000 bpd, respectively. The 4-week average implied gasoline demand remained just above 9 million barrels per day, the highest level since the COVID-19 outbreak.
Positioning in the energy market is very supportive of higher oil prices. Fund managers’ exposure to WTI crude oil is at the lowest level in at least a decade. While sluggish sentiment held back prices, the physical market continued to digest excess inventory. It is expected that as the fundamentals begin to tighten in the second half of this year, the position structure is conducive to price increases. We expect CTA trading to initiate buying after a breakout of the trading range, ie a breakout of $74/bbl for WTI and $78/bbl for Brent, which could provide the needed momentum for further gains.
We remain bullish on crude oil and other major commodities, expecting a rebound in oil prices following the ongoing largest-ever commodity destocking. If the major economies, including the US, can avoid a deep recession, the basis for commodity price increases remains intact, although the current price trend is different from our previous forecast. Those of us who are bulls can take comfort in the fact that end demand across the commodity market is showing no signs of fading, and supply-side investment remains elusive.
While price action so far has defied our forecasts, what we are currently seeing may be the largest destocking ever seen in commodity markets. Investors are also cashing in on hedging, all of which set the stage for higher commodity prices later this year. Oil and commodity prices and interest rates would rise in the absence of a recession, but things could turn bad for stocks. While manufacturing-related data point to weak demand, headline demand and inventory data for commodities support our more optimistic view.
In early April, we raised our Brent price forecast to $95 a barrel from $90 by the end of the year, after OPEC+ announced it would cut its output by more than 1 million bpd between May and December. It also raised its 2024 Brent price forecast to $100 from $97.
Brent is currently $8/bbl cheaper than our fair value model as well as our Q2 forecast. While OECD crude oil inventories are starting to draw down, we see no fundamental change in the forecast parameters. Our supply and demand forecasts show that the oil market was largely balanced from January to April, but will be in deficit for the first time in May. The latest export data showed that as of May 16, the eight OPEC+ oil-producing countries were meeting their production cut commitments, with a total output drop of 1.7 million barrels per day. In addition, we continue to expect a further tightening of the supply-demand balance in the second half of the year as wildfires in Canada reduce output and demand will be more resilient from this month onwards, while Brent remains at $90/bbl Our forecast target.