The final day of the week finds forex markets in risk-off mode with both the Japanese yen and the US dollar firmer but others, including the euro, commodity dollars and emerging markets currencies trending weaker. Among commodities themselves, geopolitical risk and benign inflation are sapping demand.
Article / 25 May 2016 at 9:19 GMT

Oil has unfinished business at $50/barrel

Head of Commodity Strategy / Saxo Bank
  • Crude revisits year's highest levels ahead of EIA report
  • $50/barrel handle is once again acting as a magnet 
  • Strength of report will determine whether a break will happen
  • Stronger dollar through May has not deterred oil bulls

All eyes on the EIA. Photo: iStock 

By Ole Hansen

Crude oil has returned to the highest levels of the year with US inventory focus more than offsetting the headwind created by the stronger dollar and reduced supply disruptions. The $50/barrel handle is once again acting as a magnet and the strength of the inventory report at 1430 GMT will determine whether a break can and will be attempted.

The stronger dollar through May has not deterred oil bulls with the focus on major supply disruptions in Canada and Nigeria instead attracting the attention. Both WTI and Brent crude have as a result now for the past week been hovering just below the psychological level of $50/b. 

Hedge funds, sensing the reduced momentum at the beginning of May when the dollar strengthened, were net-sellers for a couple of weeks. But spurred on by the mentioned supply disruptions they returned as strong buyers last week. A total of 75 million barrels were bought during the week ending May 17 leaving the combined net-long close to a record at 650 million barrels. 

Speculative positioning in Crude oil
Short sellers continue to throw in the towel. Not least in Brent crude oil where the gross-short has collapsed to just 26 million barrels resulting in the long/short ratio hitting a new record of 16.1.

Brent crude long/short ratio

Brent crude remains within its current uptrend and a potential breakout this afternoon following the inventory report could propel it higher to the actual resistance which is at $50.90/b. With very few short positions left in the market to defend the bulls currently have the upper hand. The stronger dollar will be ignored unless we get a somewhat stronger than expected report. Likewise a strong report would challenge longs with support at $47.5 being the first line of defence. 

Brent crude oil future continuous:
Brent Crude oil, first month cont.
Source: Saxo Bank
The EIA report is more than just just one set of data so the focus today will apart from inventories, where a 2 million barrel drop is expected, also be gasoline inventories and implied demand as well as the estimated level of production. 

DOE data
Click here for the calendar link to the EIA report, live at 1430 GMT. 

 Ole Hansen is head of commodity strategy at Saxo Bank. His Twitter account was cited by MarketWatch as one that investors should follow in 2016.

– Edited by Clare MacCarthy

Ole Hansen Ole Hansen
EIA inventory results and reactions will be posted here once released
Ole Hansen Ole Hansen
Crude inventories dropped by more than expected on reduced supplies from Canada. Against this gasoline inventories rose while refinery and implied gasoline demand both weakened
Ole Hansen Ole Hansen
Various charts
John Roberti John Roberti
dear Ole, For me, one key element is the fact that production in 48 states has declined only by 4.000 bpd which is a confirmation of what you anticipated and thus oil must go down if Saudi wants to hurt further the US shale oil industry
John Roberti John Roberti
Dear Ole,
Do you have information as to the restart of Canadian oil production in Alberta? Would it be long before full production is reached? thanks in advance
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