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 / 25 October 2017 at 10:11 GMT

Multiple support but no break for oil ahead of EIA

Head of Commodity Strategy / Saxo Bank
  • Brent crude oil trades near the top of its range ahead of today's EIA report
  • Support from global growth, robust demand, high compliance and geopolitical risks 
  • However, a record fund long and fears of faster non-Opec production cap the upside
Crude oil
 Crude oil price is riding high ahead of new EIA stats. Pic: Shutterstock

By Ole Hansen

Brent crude oil trades near the top of its range ahead of today's weekly stock report from the EIA (14:30 GMT). Synchronised global growth, robust demand for oil, high compliance and geopolitical risks providing support. Capping the upside for now is a record fund long and concerns that current prices could accelerate non-Opec production further.

Brent crude is currently testing $58.50/b resistance ahead of the September top at $59.50/b. 

Brent Crude oil, first month cont.

 Source: Saxo Bank

The key level of resistance however is not the psychological $60/b level but instead $61/b which represents a 38.2% retracement of the 2014 to 2016 selloff.

Brent Crude oil, first month cont.
Source: Saxo Bank

Synchronised global growth

Commodities are currently reacting to data showing strong and synchronised global growth. The latest manufacturing PMI data for September showed a broad-based rise, not least in key oil consuming economies such as Europe, China and the US.

PMI Manufacturing heatmap
Supply and demand

Opec and Russia's efforts to curb supply thereby help bring the market to a level of balance seem increasingly successful, not least helped by high compliance which according to Opec itself exceeded 100% during September. The group at this stage however cannot rest on their laurels as the current outlook, provided by the three major energy organisations, for demand and supply in 2018 leaves no room for Opec and Russia to increase output.  Another year of strong demand growth is likely to be met by a similar increase in non-Opec production, not least from the shale oil fields across the US.
Oil supply and demand

Source: Bloomberg, Saxo Bank

Geopolitical risks on the rise

Multiple supply disruptions following the Arab Spring in 2011 helped support the price of oil above $100/b up until 2014 when a major response from US producers help create a major shift towards an oversupplied market. 

Just as these supply disruptions, according the below chart, hit a five-year low we are once again seeing risk of disruptions emerging. The conflict between the Kurdish regional government and the central government in Baghdad has so far halved to 300,000 b/d the daily flows through the important export pipeline to Ceyhan in Turkey. President Trump's decision not to certify Iranian compliance with the UN agreement has increased the risk of a crisis which could see oil flows being negatively impacted. Elsewhere the fall in Venezuelan output continues to accelerate while downside risks to Libya and Nigeria production exists given continued political instability. 

This rising risk of supply disruptions into a market that is moving towards a balance has left it more exposed than any time since 2014. On that basis we have probably witnessed a small geopolitical risk premium being added to the price. Not least in Brent crude, the global seaborne benchmark, which has left the premium to WTI close to $6/b.

Supply disruptions

Source: EIA, UBS
Speculative positioning

Hedge funds have been active buyers of crude oil for the past couple of months and Brent crude, the global benchmark, has seen improved fundamentals due to dwindling stocks and now also due to rising risk of disruptions. The net-long stood at 729,000 lots in the week to October 17 with Brent crude accounting for a record 64% of this exposure. Improved Brent fundamentals and the mentioned risk of disruptions has seen investors flock to Brent at the expense of WTI where the gross-short has been rising for the past three weeks. 

COT on oil
So why are we still trading below $60/b? The threat of an even bigger response from US shale oil producers following WTI's return above $50/b is likely to cap the upside for now. Unless supply disruptions increase and/or demand growth rises by more than expected the market still has to deal with the challenge of just how Opec and Russia can step away from their production cut agreement. Opec and Russia are in a similar situation to central banks. Finding the exit without disturbing the market will be very hard to achieve. For now, however, there is little or no room to increase production next year .

EIA's Weekly Petroleum Status Report 

But today the focus rests squarely on the weekly stock, trade and production report from the Energy Information Administration. The market traded higher overnight following the weekly report from the American Petroleum Institute which showed a small rise in oil stocks but a major decline in fuel. 

EIA survey

What to look out for

Since August first Hurricane Harvey then Nate managed to cause havoc to the data. Crude oil production is expected to recover following the 1.1 million b/d slump last week caused by Nate. WTI's elevated discount to Brent has triggered a surge in exports which has left US net-imports at near record lows. Robust export numbers and a decline in stocks at Cushing, the delivery hub for WTI crude oil futures,  will be needed in order for the spread to narrow. Refinery demand slowed by almost 600,000 b/d last week and if that trend continues, due to low seasonal demand oil may struggle.

EIA charts

– Edited by Clare MacCarthy


Ole Hansen is head of commodity strategy at Saxo Bank 

Ole Hansen Ole Hansen
This comment has been redacted
Ole Hansen Ole Hansen
Crude oil and products trading a tad higher following the EIA report which more or less replicated the findings from yesterday's API report. Production returned to normal following hurricane Nate while both exports and imports rose.
Ole Hansen Ole Hansen


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail