- 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
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.
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.
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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.
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.
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.
Updates to follow in the comment section following the release.
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank