Article / 15 June 2016 at 13:51 GMT

Crude under pressure ahead of inventory report

Head of Commodity Strategy / Saxo Bank
  • Recent rally sees WTI double its February level before hitting the wall
  • WTI crude retraced after hitting technical resistance below $52/b
  • Gasoline inventories currently sit at a 20-year high for this time of year

RV road trip
In terms of the US driving season's effect on crude oil prices, 
the bigger your rig the better. Photo: iStock

By Ole Hansen

The multi-week crude rally ran out of steam last week but not before WTI had managed to double from its February low. Raised uncertainty related to the UK referendum on June 23 combined with the oil market being increasingly overbought helped turn it around. 

Up until then, the primary focus and support had come from numerous supply disruptions which during May helped reduce the gap between supply and demand.

The trigger for the reversal, apart from the technical developments, was the "double punch" received through the first weekly rise in US rigs combined with the first weekly rise in production since March. 

While the impact of these developments from a production perspective remains very limited at this stage, it did however send a signal to the market that oil above $50/barrel at this stage carries the risk of reversing the trend of falling non-Opec production.

WTI crude retraced after hitting technical resistance below $52/b and a weak close on the weekly chart sent a signal that  consolidation was back on the table. Having retraced almost 50% of the rally from the most recent consolidation area, traders will be looking towards today's inventory report for additional guidance.
WTI Crude oil with extension

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Source: Saxo Bank

The monthly Oil Market Report from the International Energy Agency released on June 14 said that the global oil market would almost balance next year with demand continuing to rise faster than production. 

It did, however, also say that the "enormous inventory overhang" would take time to clear and should limit any significant increase in prices. 

IEA Supply and demand

The weekly inventory report combines multiple data points to give us a good overview on the current state of the US energy market. The data, which show developments within inventories, production, refinery activity, import, and demand, often have a major impact on the market. 

It also tends to create some confusion with the focus changing from week to week. 

Having seen production show a small increase last week, this number will be watched closely. Inventories should fall from a seasonal perspective, so anything other than a drop will be taken negatively. 

Late yesterday the American Petroleum Institute reported a counter-seasonal rise of 1.16 million barrels and that has supported the additional weakness today. 

Gasoline inventories currently sit at a 20-year high for this time of year and as result gasoline refinery margins have been under pressure for the past month. The spread between WTI crude and RBOB gasoline measured in dollars/barrel currently trade at $14.5/b – half compared to the same time last year and the weakest for this time of year since 2010. 

Without strong demand for gasoline this summer refinery activity may slow thereby leaving more crude oil in their tanks instead of being refined. 

DOE data
I will post updates below once the report is released (calendar link here).

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank

Ole Hansen Ole Hansen
WTI and especially gasoline trading higher following the report. Gasoline inventories fell by more than expected while a smaller than expected reduction in crude oil was off-set by a 29k production cut.
Ole Hansen Ole Hansen
Gasoline was the main beneficiary as the surplus gap narrowed. Following this on balance price supportive report we can now gauge the current market sentiment from how it treats the rebound. So far it has been met by some light selling with the attention turning to the FOMC announcement later.
John Roberti John Roberti
Dear Ole, over two weeks, we have a neutral position in gasoline consumption and a neutral position, in domestic crude production. The algorithms have pushed first the price up 1 dollar but then, the market reacted and yesterday night oil was already lower than before EIA figures! This morning, it continues to decline? Where do you think it could go next? Do you think the Brexit fears surrounding the markets influence oil prices also? We could probably expect that stock markets will continue to decline! Would this also affect oil prices? Your opinion would be appreciated. Thanks in advance
Ole Hansen Ole Hansen
Crude oil is continuing lower for a sixth consecutive day with the prevailing risk-off sentiment triggering a reduction in bullish oil bets which as of June 7 stood at a near record at 633 million barrels. Oil fundamentals remain pretty balanced at this stage, but we have seen in the past how periods of long or short liquidation can move markets further than expected. WTI has corrected half of the supply disrupted rally seen during May with the next key level being 46.35/barrel (61.8%)


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