Brent: Catching its breath?
Last week, the tariff brinksmanship between the US and China saw China go toe-to-toe with escalatory reciprocal US tariffs, which ratcheted up to 145%. Yet, the rest of the world got a reprieve, with reciprocal tariffs suspended for 90 days, but still retaining a 10% base rate level. This allowed the front-month Brent contract to catch its breath, recover from its sub-60 doldrums on 09 April, and close the week just under $65/bbl. Longer-term technical support levels established in March 2021 at circa $60.30/bbl also seemed to play a role in arresting Brent’s descent. Last Tuesday, the move lower into the high 50s coincided with money managers drastically reducing their net long exposure to the Brent. US trade policy uncertainty will remain the primary driver of global markets. The tariff exemption announced last week for semiconductor and electronics trade with China still needs clarification. In any event, US yields have taken the mantle of the perceived damage of US trade policies. The higher US yields go while the dollar counter-intuitively retreats, the more sombre sentiment across other markets, including oil (see chart). In the meantime, the geopolitical landscape may help to shape expectations around future supply conditions, with the US and Iran kicking off nuclear talks in Oman. Positioning on oil futures, in our view, remains fragile. President Trump characterised the market as becoming “a little bit yippy” as the motivation for his retaliatory tariff suspension decision. In our interpretation of “yippy”, we suspect this is still the case. There seems to be a clear divide between physical and financial markets, whereby time spreads and DFL in Brent are strong while the futures flat price is downwardly sensitive to the macro environment. Without notable data releases this week, the themes above (summarised in the bullets below) will guide price direction in our view. Though Brent was pushing above $65/bbl earlier today, it has reverted to that level at the time of writing. We expect the front-month futures to settle the week lower between $62-63/bbl.
- US tariff policy: needs clarification
- Geopolitics: US vs Iran, can they make it work?
- Positioning: weak confidence
US trade policy seems to be changing with President Trump’s whims. Retaliatory tariffs have been suspended in favour of a baseline rate for 90 days, with the exception of China. Just last week, tariffs on semiconductors and electronics from China were seemingly lessened to the base retaliatory tariff rate, plus those related to the fentanyl trade. Nasdaq and S&P futures were up Monday morning, while Apple shares jumped in pre-market trading. The benchmark 10-year US yield was down from its 4.5% plus print last week, and risk appetite seeped into oil prices this morning. Yet, regarding trade policy, we cannot preclude further US presidential announcements on social media that could temper some of this enthusiasm, particularly regarding the enforcement of tariff policy.
The US and Iran started talks in Oman this past weekend and will meet again next Saturday in Rome for further nuclear negotiations. This first meeting comes on the heels of the US tightening sanctions on Iran, notably sanctioning vessels and ports tied to the Iranian oil trade. After the talks, Iran’s foreign minister, Abbas Araghchi, and US special envoy Steve Witkoff met briefly. Overall, the talks were described as constructive. If the current course of diplomacy is maintained, this could lead to the market lowering its probability of a US campaign of maximum pressure on Iran, and thus the likelihood of significant crude export outages.
The commitment of traders data released by the ICE exchange for Tuesday last week showed money managers sharply curtailed their net exposure to Brent futures by paring gross long positions and adding new gross short positions. The long-to-short ratio on the contract is down to 2.36:1, compared to over four only a month ago. For more timely data on risk-taker behaviour, Onyx’s proprietary CTA model shows that this category of market participants is currently short nearly 14 thousand lots, having briefly positioned themselves roughly flat in early April. In the current environment, it would seem that de-risking remains the path of least resistance, unless we have an unexpected breakthrough in US-China trade relations.
