Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 04 October 2017 at 11:37 GMT

Crude oil bulls fret another bearish EIA report — #SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • Crude oil correction continues ahead of today's data from the EIA
  • 'Still too early' for oil market to look for sustained rally above $60/b
  • Rising backwardation in Brent crude has started to fade

EIA report
The short-term risk for crude oil remains to the downside. Photo: Shutterstock

By Ole Hansen

The correction in crude oil and products that began a week ago continues ahead of today's Weekly Petroleum Status Report from the US Energy Information Administration. 

A surprisingly bearish report last week helped change what up until then had become increasingly bullish sentiment. The month-long rally to that point had led to a surge in speculative buying, resulting in record net-longs being established in Brent crude, ULSD (Ticker: HO), and gas oil (Ticker: FP). 

Fundamentals have improved during the past quarter with strong demand growth being met by steady supply following Opec and Russian supply cuts and temporary disruptions following Hurricane Harvey. But the market is also realising that it is still too early to start speculating on a sustained rally beyond $60/b. 

Long positions need adjusting and that process is currently ongoing. Speculative flows tend to overreact in both directions and on that basis the short-term risk remains skewed to the downside, especially if the EIA report delivers another bearish surprise at 1430 GMT. 

COT on Brent and products

After failing to break $60/b, Brent crude is once looking for support. We focus on the uptrend from the June low which also ties in with the 38.2% Fibonacci retracement of that rally. 

Support at that level needs to be established in order to avoid accelerated long liquidation towards $50/b. 


Brent Crude oil, first month cont.

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Source: Saxo Bank 

The weakening fundamentals are most visible when looking at various spreads. The rising backwardation seen in Brent crude oil recently has started to fade... and with that the "free" return a passive investor receives from being long the market. 

Refinery spreads, especially the one between RBOB gasoline and WTI, have fallen back below pre-Harvey levels to an eight-month low. The tightest market has emerged in the middle distillate section represented by the ultra-low sulfur diesel future (ULSD), but even that spread has started to contract. 

The spike in US exports last week has helped reduce WTI's discount to Brent as it reduces the tightness seen recently in the North Atlantic basin which primarily represents production from the North Sea, Libya, and Nigeria. 

Crude oil spreads

The price weakness today was triggered by the weekly stock report from the American Petroleum Institute last night. For a second week in a row, API reported a bigger than expected drop in crude and rise in gasoline inventories. 

Lower crude stocks, probably due to exports and strong refinery demand, should be positive. But with stocks at the Cushing delivery hub for WTI crude oil rising by 2 million barrels according to the API, the impact has not been felt. 

Instead a big rise in gasoline stocks could further reduce refinery margins which ultimately could lead to lower demand for crude oil. 

EIA survey and recent results
In today's report we will be focusing on crude oil and gasoline inventories, as well as production and whether the record pace of exports can be maintained.  

EIA charts

Updates to follow in the comment section following the release.  

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank

Ole Hansen Ole Hansen
Oil and gasoline both higher following EIA report which showed a 6M barrel drop in crude stocks and a 1.6M barrel increase in gasoline. Distillate stocks declined by 2.65M barrels. The drop in crude stocks driven by another surge in exports of 493k bpd while imports were down 213k bpd
Ole Hansen Ole Hansen
Surging US crude oil export once again the big outlier in this weeks report. With additional barrels being moved into the global market it should further reduce WTI's discount to Brent
I guess I’m out of these dodgy price reactions on Wednesday. Anything is a reason to sell. I guess US also makes money by exporting some of its oil but some don’t like it.
About opec: I think they will keep the cuts until they can’t do it anymore, perhaps 2020.


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