Article / 13 July 2016 at 8:51 GMT

Crude rally fades as inventories come into focus

Head of Commodity Strategy / Saxo Bank
  • WTI posts strong Tuesday rally, but catalyst not immediately obvious
  • API report hits WTI hard, but EIA data today are still to come
  • Crude oil likely to spend third quarter between $45/b and 'low 50s'

Crude oil
High crude inventories point to a difficult quarter for oil. Photo: iStock

By Ole Hansen

WTI crude oil rallied hard yesterday with no particular trigger in sight apart from short-covering from funds who have stepped up selling in recent weeks. 

Improved risk appetite on fading Brexit concerns and speculation about additional stimulus from central banks helped offset short-term concerns about the oversupply of crude oil and products.

WTI crude oil remains rangebound:
WTI crude oil, first month cont.

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Source: Saxo Bank

Before reaching a peak at $51.6/barrel on June 9, hedge funds had already been active sellers of WTI (and Brent) crude oil since April. Following the Brexit vote, the reduction gathered pace and during the two weeks up until July 5 the combined net-long of WTI and Brent crude was cut by almost 100,000 lots. 

This came on raised concerns that the UK's Brexit vote would hurt demand forecasts, thereby prolonging the rebalancing process well into 2017. 
Speculative positioning in Crude oil
As prices rallied yesterday we once again saw gasoline struggle to keep up as this market remains under pressure from high inventories across the world. In the US, the spread between WTI crude and RBOB Gasoline currently trades at $12.7/b, the weakest for this time of year since 2010 and down 57% on last year. 

Later today at 1430 GMT, the weekly US inventory report from the EIA will be the next event to attract some attention. Expectations of an eighth weekly reduction in crude inventories were dented last night when industry data from the API pointed towards a rise in both crude and gasoline inventories. 

DOE data

Despite the API report's often being incorrect, the report stopped oil from rallying further and today some additional weakness has crept back in with the dollar once again making an attempt at testing support versus the euro at 1.10.

Weak gasoline margins and a rising contango on both WTI and Brent crude are both indications that crude oil could be facing a challenging quarter. With Opec producing at a record pace, the rebalancing process depends on demand continuing to rise and slowing production in the US. 

The recent rise in number of oil rigs operating in the US, combined with concerns about demand, have helped push the timing of the rebalance further out, and thereby also the timing of when oil will be able to make its next move higher. 

We maintain our view that oil is most likely to spent the current quarter trading within the established $45/b to low $50s range.

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank

13 July
Ole Hansen Ole Hansen
The IEA released its monthly report earlier. Below some IEA comments (via Reuters):
“In mid-summer 2016, although market balance is upon us, the existence of very high oil stocks is a threat to the recent stability of oil prices.”
“Although stocks are close to topping out, they are at such elevated levels, especially for products for which demand growth is slackening, that they remain a major dampener on oil prices.”
“We may well see crude oil stocks fall back but there is a risk that, unless demand turns out to be stronger than we currently anticipate, products stocks could rise still further and threaten the whole price structure.”
"There is still an ominous investment gap building up in the oil industry that might, depending on how quickly today’s record high oil stocks are eroded, create the conditions for sharply higher prices over the medium term."
Their underlying message is that the market is heading to balance but the road ahead will be far from smooth
13 July
Ole Hansen Ole Hansen
Huge stocks overhang threatens oil price recovery: IEA -
13 July
John Roberti John Roberti
Dear Ole, production is increasing in Alaska and quasi flat in 48 states thus this will not help the glut in world oil stock; furthermore gasoline stocks refuse to decrease but increase by 2,5 MM BPD, thus the holiday US consumption is not increasing significantly thus this report should push back WTI oil to at least 44,50 USD/B. Your opinion would be appreciated


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