Article / 05 October 2016 at 9:38 GMT

Crude rally continues as traders focus on US inventories

Head of Commodity Strategy / Saxo Bank
  • Oil rises on surprise API inventories drop Tuesday
  • Details of Opec deal to be revealed November 30
  • A break of $52/b could send WTI as high as $64/b
  • Brent could extend to $67.50 on a breakout

Refinery stocks
US oil inventories are in the spotlight today following a surprise API print 
Tuesday and ahead of today's EIA release. Photo: iStock

By Ole Hansen

The positive momentum seen in crude oil following Opec's agreement to work towards cutting production by November 30 has continued into its sixth day. The American Petroleum Institute reported a surprisingly large inventory drop yesterday ahead of today's update from the Energy Information Administration where surveys point to the first rise in six weeks. 

The dust has yet to settle following Opec's agreement last week to work towards cutting production by up towards 700,000 barrels. This, the first cut in eight years, has rightfully helped to create a floor under the market as Saudi Arabia goes back to its role of managing price instead of going after market share. 

The important details of the deal, such as who will cut and by how much, still need to be hammered out before being made public at the November 30 Opec meeting. 

But for now the market has given Opec the benefit of the doubt in the belief that the cartel not only will, but also has to deliver a tangible cut as a failure here could see the market sending the price of oil sharply lower once again. 

So far the technical picture has improved and this has helped reduce short positions while supporting the initiation of new longs in the market. The weekly Commitments of Traders report due Friday, which will cover the week ending October 4, will give us an important gauge as to how much hedge funds have changed their positioning after the deal was announced. 

Ahead of the announcement on September 28, hedge funds had been net buyers of WTI and Brent crude oil with a rise in the Brent crude oil gross-short being more than offset by a jump in the WTI crude oil gross-long. 

Speculative positioning in Crude oil

Bullish traders and investors are now focusing on the potential break of the necklines on the head-and-shoulder formations seen in both the WTI and Brent crude oil futures charts.

A break here would signal the potential for a significant move higher in both. 

WTI crude oil could target $65/barrel on a break above $52/b while for Brent, the much-closer-to-the-market break of $52.2/b could signal an extension to $67.25/b.

WTI crude oil, weekly chart:
WTI crude oil, first month cont.

Source: Saxo Bank

Brent crude oil, weekly chart:
Brent Crude oil, first month cont.

Create your own charts with SaxoTraderGO click here to learn more

Source: Saxo Bank

A strong technical drive, however, carries the risk of defeating itself with higher prices eventually creating headwinds as the fundamental outlook for non-Opec producers begins to improve significantly while also raising questions about demand growth. 

Based on recent developments seen in US oil exchange-traded funds, retail investors have been much less inclined to jump on the bullish bandwagon. During the past week, fund flows for US energy ETFs have been negative to the tune of $249 million. 

Activity has picked up in the popular triple exposure ETFs with DWTI (3x short) seeing inflows of $275 million while UWTI (3x long) has seen redemptions of $344 million. 

The USO ETF comes second with a redemption of $165 million.

Commodity fund flows for US ETFs since September 27:
ETF commodity flows

Technicals aside, the market will be focusing on the weekly petroleum status report from the EIA later today. Expectations for the first weekly inventory rise in six weeks were somewhat dented yesterday when the API reported a 7.6 million barrel decline. 

A survey carried out by Bloomberg points towards a 1.75 million barrel inventory drop while recent developments can be seen in the below table.

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank

matsuri matsuri
how do you assess the chances of oil going so up? adding new longs at this stage could be quite risky, in case of any negative news they will be squezzed.
Pandorra Pandorra
Thanks for sharing, Ole. Here's attached my chart for front CLX6 contract ('high' method applied) and I would like to be seriously advised, do we have a good opportunity for retracement and to reverse into short here like many times before (that corresponding to Saxo Bank Q3 trade view)..
Or rocket has been fueled much stronger at the moment like for 'no caps' flight?
Need your advice. Thanks.
Ole Hansen Ole Hansen
From a pure technical perspective the rally could extend further but sooner or later it will hit resistance from fundamental developments. We are likely to see the recent highs being challenged before considering what to do next.
John Roberti John Roberti
dear Ole, I must say I am a bit at a loss here because I cannot reconcile the figures of EIA! why such drop in stock while consumption has decreased and net imports slightly decreased, but I miss 4 million barrels??? thus difficult to guess where prices will go?
John Roberti John Roberti
Ole, we are now at basically 52 on Brent and 50 on WTI where do you think it could go further before coming back down??
Ole Hansen Ole Hansen
Hi John, That depends on whether we see an additional tech reaction to above $50 on WTI and $52 on Brent
Ole Hansen Ole Hansen
The weekly inventory report surprised once again with US inventories falling for a fifth consecutive week. The large draw from the API yesterday may have set the expectations to high and this combined with key resistance just above have so far prevented the market from rallying further.
John Roberti John Roberti
thanks for the reply on tech aspects for prices. Do you have an explanation for the missing quantities between prod and stock?
Pandorra Pandorra
Ole, okay thanks. Are you still betting to fill the gaps from Feb, 11 and Apr, 05? What time horizon is possible for this purposes on your mind?
matsuri matsuri
Mr. Ole, what about your view of oil being rangebound 45-low 50ies within next months? is it still valid?


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