Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 12 October 2017 at 14:00 GMT

IEA report hits oil ahead of weekly stocks data — #SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • Crude heads lower ahead of US inventories print
  • IEA sees risk of global stocks decline halting in 2018
  • Non-Opec production to rise by 1.5m b/d in 2018: IEA

Crude oil
Rising US crude exports could rein in the WTI/Brent crude oil spread if the API report's rise in crude oil and distillates is not mirrored by today's' EIA release. Photo: Shutterstock

By Ole Hansen

The combination of a surprise build in crude oil and distillates stocks reported by the American Petroleum Institute yesterday together with the International Energy Agency's monthly report earlier today has seen oil trading lower ahead of the weekly US inventory report at 1500 GMT.

The IEA sees a risk of the global inventory decline coming to a halt in 2018 in response to strong non-Opec production growth.

Despite all the noise the oil market has to deal with on a daily basis, the fact remains that it has been rangebound for the past 18 months. The gap between rising supply and an even faster rise in demand has helped trigger a pric- supportive narrowing of the gap between the two in recent months. 

The upside, however, remains limited, not least following today's monthly Oil Market Report from the IEA. In it, the organisation stated that: "looking into 2018, we see that three quarters out of four will be roughly balanced – again using an assumption of unchanged Opec production, and based on normal weather conditions. However, our current numbers for Q1'18 imply a stock build of up to 0.8 million barrels/day. Taking 2018 as a whole, oil demand and non-Opec production will grow by roughly the same volume and it is this current outlook that might act as the ceiling for aspirations of higher oil prices".

These assumptions leave limited or no room for Opec, Russia, and other members to adjust lower the current production cap agreement once it expires next March. The IEA sees non-Opec production rising by 1.5m b/d in 2018, slightly more than its global demand growth forecast of 1.4 million b/d.

WTI crude oil, first month cont.

Source: Saxo Bank

Up until yesterday crude oil had recovered 61.8% of the early October correction which was triggered by two consecutive bearish US inventory reports. Hedge funds, however, remained resilient throughout this correction with bullish bets on crude oil and products seeing only small reductions. 

Speculative positioning in energy futures

Traders have several key data points to focus on in today's inventory report, some of which risk pulling the price in opposite directions. If API's rise in crude oil and distillate stocks is repeated, the result is likely to be negative given the potential for inventories at Cushing, the delivery hub for WTI crude oil futures, continuing a counter seasonal increase. 

Such a result could lend support to a further widening of the discount to Brent crude oil. 

EIA charts
The dramatic jump in US crude oil exports over the previous two weeks was probably the main reason behind the market's negative reaction, not least because it helped reduce the tightness in the Atlantic basin (Brent crude oil) that had build up post-Hurricane Harvey. 

Rising exports will counter the aforementioned potential for negative impact on the WTI/Brent crude oil spread. 

Crude oil spreads

EIA's Weekly Petroleum Estimates Report with API and survey results
DOE survey
I will post the results and market reactions below once the report has been released.  

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank

Ole Hansen Ole Hansen
Limited market reaction to the EIA report despite seeing the API data being wrong on all three. Hurricane Nate played its part on trade, production and stocks.
Ole Hansen Ole Hansen


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