Article / 16 August 2017 at 9:55 GMT

Oil looks to EIA for confirmation of current range

Head of Commodity Strategy / Saxo Bank
  • WTI and Brent crude prices finding support after retracement
  • EIA report expected to be bullish after API's bigger-than-forecast inventory drop
  • US shale producers need WTI oil price around $50/b to break even, Reuters says
  • Upside potential above $50/b on WTI remains limited as Opec struggle to clear glut

Oil platform
 Oil prices are finding support after dropping from their 
summer rally. Photo: Shutterstock

By Ole Hansen

WTI and Brent crude oil have both found support after retracing 38.2% of the June-to-August rally. Whether that will be enough and thereby confirm oil's current rangebound nature will depend on today's weekly petroleum status report from the US Energy Information Administration (EIA). Another bullish set of data is expected after the American Petroleum Institute reported a bigger-than-expected stock decline yesterday.

During the latest rally, the forward curve flattened again. This occurred as producers once again stepped up their hedging activities once the Calendar-18 contract in WTI crude oil made it back above $50/barrel. According to a recent Reuters report, which analysed financial statements for the second quarter, US shale producers need a WTI price around $50/barrel to break even. 

On that basis, the upside potential above $50/b on WTI remains limited as Opec will struggle to clear the global glut any time soon, with rising prices having the potential of increasing US shale oil production further. 

Brent and WTI crude oil prices have found support after a relatively mild retracement from the June-to-August rally.
Crude oil
Source: Saxo Bank

The return to backwardation in the Brent crude oil prompt spread — first futures month trading higher than the next — has helped push Brent's premium over WTI back above $3/b to levels last seen in December 2015. Investors prefer backwardation as it provides a positive roll carry on long positions. This was seen last week in the Commitments of Traders report for the week to August 8. Funds raised bullish bets on Brent by 58,255 lots, while WTI was cut by 2,253 lots.

Three failed shorting cycles since March have now been replaced by a third long cycle. During the past six weeks up to August 8, funds cut short positions in Brent and WTI by 209,000 lots, while adding 138,000 lots of longs. This has left the net long at 705,000 lots, the highest since early April, which was the peak of the first of the three mentioned long cycles. 

The limited correction so far has not been big enough to force any major change in positioning. For that to happen WTI crude oil probably needs to slide below $45.40/b and Brent below $48/b.

Speculative positioning in Crude oil
Looking ahead to today's inventory report, the market will once again focus on developments in both crude oil and gasoline stocks. A potential second counter-seasonal increase in gasoline stocks could have a dampening impact on what is expected to be the seventh consecutive weekly drop in oil stocks.

US motorists demand for gasoline tends to slow following the labour day holiday in early September, which usually signals the end of the US driving season. Any signs of this being brought forward may also dampen the positive impact of a strong headline decline in crude stocks. 

DOE data

The above-mentioned widening of the discount to Brent crude may have a positive impact on exports, while imports from Opec countries, which slumped by 1 million b/d last week, will also be watched. 

EIA survey and recent results

Updates and comments will be posted below after the release at 1430 GMT 

— Edited by John Acher

Ole Hansen is head of commodity strategy at Saxo Bank

16 August
Ole Hansen Ole Hansen
US crude stocks declined by 8.9m barrels last week while gasoline rose by 22k and distillates by 702k. Production jumped to 79k b/d while stocks a Cushing rose by 678k barrels. Imports from Opec countries were higher by 486k b/d. Crude oil trades softer, probably in response to strong production and the expectations of a big drop inventory drop.
16 August
Ole Hansen Ole Hansen


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