Taking Off Risk
On Monday, we forecast that the M1 Brent futures contract will be between $78 and $81/bbl at the end of the week. At 12:45 GMT (time of writing), the contract is around the lower end of this range, at $78.70/bbl.
Retrospectively, we identify three drivers of price action this week:
- Trump 2.0 failing to instill supply-side concerns in week one
- Players unwinding hedges from the M1 futures
- Bearish technical signals
Previously, the market was apprehensive ahead of Donald Trump’s inauguration on Monday, awaiting declarations around tariffs and sanctions. President Trump declared a national energy emergency to unwind Biden-era measures and unlock US energy potential, matching his ‘drill, baby, drill’ mantra. With US crude production at record, more supply, should shale buy into Mr Trump’s calls, will be perceived as bearish. While Trump did threaten more sanctions on Russia as an ultimatum this Wednesday, the Kremlin largely downplayed these concerns. Kremlin spokesperson Dmitry Peskov reportedly remarked that Trump “liked sanctions” and used them often in his first term, stating that Russia was ready for an equal and careful dialogue with the US. In the plethora of executive orders that came out this week, we saw no communication around Iran and hints at implementing maximum pressure on the country. Interestingly, the Houthis, supported by Iran, indicated they would no longer attack ships sailing the Red Sea. On tariffs, Trump said he’d “rather not” impose tariffs on China in an interview with Fox News host Sean Hannity while maintaining the threat. Finally, in true Trump fashion, the US president called on OPEC to lower the cost of oil during a remote speech made to executives attending the World Economic Forum in Davos.
Positioning-wise, last week’s volatility led to a rise in length in the M1 futures as players sought to hedge against the uncertainty behind Trump’s first few days in office. The lack of bullish impetus that followed Mr. Trump’s inauguration led to an unwinding of these positions. Open interest in the Mar ’25 Brent futures contract fell by 35% in the week ending 22 Jan to 286mb. In addition, Onyx’s CTA positioning model highlights a 50% decline in CTA net length w/w to 17k lots on 24 Jan.
Finally, we stated that a bearish candlestick on 20 Jan would form a “three black crows” candlestick pattern in the M1 Brent futures, a bearish indicator for the contract. As expected, prices settled lower on 20 Jan and continued to do so in the remainder of the week, falling from $81.04/bbl at the start of the week to dropping below critical support levels such as the 13-day moving average (MA) at $79.45/bbl and briefly dipping below $78/bbl. Underscoring the shift in momentum further, the MACD line fell below the Signal line. Still, we note support at the 21-day MA of $77.86/bbl, seeing prices recover from this level this morning and recommend monitoring whether prices dip below this key level.
