Market Opinion Commodities

Commodities US$62.00/bbl Key Support

The sell-off in front month Brent crude, to which we first alluded days before Hurricane Katrina, has materialised. The contract fell last week to find good support at the US$62.00/bbl level. On a technical basis, if this level were to give way, we would expect further losses to key trendline support at US$56.00/bbl.

The decision by the International Energy Agency (IEA) to release 2 million barrels per day over a 30-day period from its emergency reserves – which also include refined products - has assisted in the latest price decline. Furthermore, the announcement over the weekend by OPEC that it wants to increase output by just under two million barrels a day could well see a re-test of the US$62.00/bbl level. Indeed, the cartel’s acting General Secretary Shihab-Eldin Adnan has been quoted as saying that its members are not interested in record high prices that could trigger a recession, and that an increase will be outlined at their next meeting in Vienna on September 19.

That said, even if Brent were to drop lower, we would expect good buying in the mid to high 50s given the strength of underlying global demand, and, as such, expect prices to stay high in general, with, of course, the risks of spikes higher still very much with us. Over the coming weeks, much depends on the ability of US oil refineries to come back online. In this respect, the drop in gasoline futures may be a little premature, given the multi-month loss of production for a number of refineries.

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