View: Neutral-to-Bullish
Target Price: $63-65/bbl
The M1 Brent futures flat price contract found a floor below $63/bbl on 6 Nov and has since risen to $63.90/bbl at the time of writing on 10 Nov. Short-term technical movements hint at near-term consolidation. However, we remain neutral to bullish on prices this week, expecting them to oscillate around $63-65/bbl.
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- Shifts in product balances
- First signs of progress towards ending the US government shutdown
- Longer-term technical buy-side signal
Shifts in Product Balances
Amid the continuing narratives of an oil glut still weighing over the market, refined products tell a different story. As of the week ending 31 Oct, US middle distillate inventories sit at around 111mb, 3.7% lower y/y and 7.6% below the 5-year average. Meanwhile, US gasoline stocks sit 2.5% below the y/y and 4% below the 5-year average at 206mb. As a result, M1 refinery margins have risen to their highest level since February 2024, providing a floor for crude prices. While we are now beginning to see resistance at these levels, with the M1 ICE gasoil swap crack softening from a high of $34/bbl on 7 Nov to below $31/bbl at the time of writing on 10 Nov, we recommend monitoring continued developments in product balances as we inch closer to seasonally higher wintertime heating demand. Forecasts indicate that the northern USA will likely experience cooler-than-average temperatures this year. Moreover, signs are emerging that the Arctic polar vortex may weaken further into December, allowing frigid air to move southward, intensifying fears of colder weather. US distillate stocks relative to product supplied (a proxy for demand) currently stand at their lowest level, except for the 2022-23 period, for this time of year. Hence, further product inventory draws will maintain supported margins, thereby supporting crude oil demand.
A possible end to the US government shutdown
Following a weekend of talks in Washington, the US Senate has approved a deal aimed at ending the longest US government shutdown in history. The shutdown’s formal end still hinges on a vote in the House of Representatives, but the agreement marks meaningful progress between Democrats and Republicans and raises hopes for a resolution. Approximately 1.4 million federal workers have been furloughed or are working without pay since October, disrupting numerous services, from U.S. air travel to food benefits for low-income Americans. A potential government reopening could lift consumer sentiment, which fell to its second-lowest on record per the University of Michigan on 7 Nov. Firmer consumer confidence could support risk assets such as oil, though a stronger market reaction likely awaits further steps toward a finalised bipartisan deal.
Longer-term technical buy-side signal
Despite the longer-term bullish factors in the market, prices have been consolidating recently, moving in a downward channel since 23 Oct. In line with this pattern, prices met resistance at the upper band of this channel, and we now expect them to meet a floor at the channel’s lower band, around $62.65/bbl. However, we caveat that such consolidation is often a precursor to a breakout in the longer term. Moreover, this sideways pattern followed a significant bullish candle on 22-23 Oct, forming what technical analysts call “a flag”. Such “flags” tend to be continuation patterns, hinting at further bullishness at the end of the sideways move. Hence, watch for a price close above the upper band of this flag, which would clear the way for further buy-side until the next resistance level at the 50-day MA (blue line on the chart).
