Article / 10 January 2018 at 14:16 GMT

Oil bulls order bears to back off — #SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • Supply disruptions and falling US and global inventories have driven crude oil higher
  • Bullish news is commanding more attention than potentially bearish signals
  • Commodities generally benefiting from increased focus on inflation
  • Market awaits fresh input from EIA's weekly petroleum status report at 1530 GMT

Bull and bear
 Oil bulls are seeing off the bears at the moment. Image: Shutterstock

By Ole Hansen

Crude oil continues higher, with Brent crude toying with $70/barrel, while WTI has reached its highest level since December 2014. The market is telling potential sellers to back off or risk being stopped out, and such is the current mood that bullish news tends to get more attention than potentially bearish signals.

Multiple realised and unrealised supply disruptions together with falling US and global inventories all helped propel crude oil higher in recent months. Missing from the equation, however, has been the illusive corrections once supply disruptions either faded or failed to materialise. This highlights the current sentiment and bullish traders ability to protect a record long position of more than one billion barrels. 

Commodities in general are benefiting from an increased focus on inflation as the current expansion cycle moves toward its late stage where price pressures tend to build. Commodity index investors have pushed the Bloomberg Commodity index (BCOM) to an 18-month high, while the energy-heavier S&P GSCI has reached a 27-month high. With crude oil representing 39% of the exposure in the S&P GSCI and 15% in the BCOM, any demand from index investors will benefit crude oil more than most other commodities.

US President Donald Trump is only a few days away from once again having to decide whether to certify Iran's compliance with the nuclear deal and thereby continuing to waive the sanctions that were lifted after the deal in July 2015. Stepping away from the agreement between Iran and five other nations could trigger a unilateral reintroduction of sanctions against persons or organisations, which could hamper Iran's ability to maintain -- let alone expand -- its production. 

Another potential source of support for oil is that Venezuela remains on the brink of collapse. Lack of funding and new investments has led to a steep decline in the national oil company's ability to produce and ship crude oil. 

Iran and Venezuela oil production

Crude oil pushed higher yesterday after the US Energy Information Administration's monthly Short Term Energy Outlook. The EIA revised higher its global demand growth forecast for 2018 by 100,000 barrels/day. However, at the same time, it also increased its non-Opec supply view by 300,000 barrels/day. The latter change was primarily due to another upward revision in US production growth as US producers continue to benefit from higher prices.

Recent developments in supply and demand forecast. January reports from Opec and the IEA are due on January 18 and 19 respectively.
Oil reports

A bumper crude stock draw of more than 11 million barrels was reported by the American Petroleum Institute last night. Crude oil extended its rally in the belief that today's Weekly Petroleum Status Report from the EIA could surprise and show a bigger drop than the 3.75 million barrels expected in a survey by Bloomberg. 

EIA survey and recent results
Both crude oil and gasoline stocks tend to rise during the first quarter of the year as demand from refineries and drivers slows. Lower imports and rising exports of crude oil have, however, helped extend the period of price-supportive stock draws. Having rallied strongly since yesterday, an EIA result in line with expectations could trigger some profit-taking, but with the mentioned Trump deadline looming, any accelerated selloff remains unlikely for now. 

EIA charts

WTI crude oil has broken the 2015 high at $62.58/b -- now support -- with no visible level of resistance presenting itself before $66.90/b, the 50% retracement of the 2014-16 selloff. Short-term momentum, however, looks stretched, with the 14-day RSI at 75.7.
WTI crude oil, first month cont.
Brent crude oil has yet to break above its 2015 peak which, at $69.65/b, sits just below the key psychological level at $70/b. This is followed by $71.40/b, the 50% retracement of the 2014-16 selloff.

Brent Crude oil, first month cont.

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Source: Saxo Bank

— Edited by John Acher

Ole Hansen is head of commodity strategy at Saxo Bank
Ole Hansen Ole Hansen
Crude oil and products trading softer after US stocks of crude oil dropped by 4.9m barrels, less than the 11m seen by the API. Both gasoline and distillate stocks build by more than expected. The EIA revises down its baseline for U.S. oil production significantly, pegging last week output at 9.492m b/d (down 290,000 b/d from the previous week). Both imports and exports slowd


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