Energy supply risk premia continues to melt out of crude oil prices, but the set-up for a tactical rebound is strengthening, TDS’ Senior Commodity Strategist Daniel Ghali notes.

Rebound risks are strengthening

“Traders have concluded that this chapter of the conflict in the Middle East has ended, despite continued risks surrounding a potential tit-for-tat escalation and, regardless of its limited implications for global oil markets, some evidence that energy infrastructure in the Abadan refinery may have been damaged during the attacks.”

“Our return decomposition framework highlights that over the course of yesterday's session alone, supply risk premia sapped approximately -4.5% from Brent crude prices, whereas CTA selling activity added nearly -1% to the downmove. Looking forward, however, the set-up for a rebound is strengthening.”

“Trend following algos are now 'max short', continued evidence of reflationary tailwinds in demand may ultimately provide a cross-current to continued headwinds from supply risk, and our simulations of future prices suggest that nearly all scenarios over the coming week will lead to algo buying activity in Brent crude markets.”