15 June 2016 at 13:51 GMT
- 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
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.
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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.
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.
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank