Article / 08 June 2016 at 13:27 GMT

Oil squeezing higher ahead of US inventory update

Head of Commodity Strategy / Saxo Bank
  • US producers see 'light at the end of the tunnel'
  • EIA report expected to show declining inventories
  • Heavy gasoline demand forecasted for US driving season

Driving season
On the road again: The US driving season is expected to boost 
oil prices as motorists cruise the Interstates. Photo: iStock 

By Ole Hansen

After trading sideways for a couple of weeks, WTI and Brent crude oil have both resumed their rallies this week. Continued supply disruptions, reduced inventories in the US, and a weaker dollar have all been supporting this move. The rally has cheered pressured US producers with the light at the end of the tunnel glowing ever brighter.

Attacks on oil infrastructure in Nigeria by the Niger Delta Avengers are not showing any signs of slowing down. Instead they have promised to disrupt the entire country's oil production. While the group is not expected to be successful with these threat, Nigeria's daily production has nevertheless slumped by more than 1 million barrels/day to the lowest point in two decades. 

The annual decline in US inventories is now well under way and surveys are pointing towards a 3 million barrel decline when the latest report is published later today at 1430 GMT. US crude inventories tend to decline from May to September, which is the peak period for refinery demand and gasoline consumption in the US. 

While currently 58 million barrels above last year, Canadian production outages and declining US production, combined with strong gasoline demand from US motorists, may help to relatively tighten the market this summer. 

EIA inventories and refinery demand

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The US Energy Information Administration published its monthly Short-Term Energy Outlook yesterday and in it the group raised price expectations for crude oil while pointing towards record demand for gasoline from US motorists this summer. Production is expected to continue its decline throughout 2016 and well into 2017, leaving it down 1.2 million b/d from its 2015 peak. A steady increase in production is not expected until the end of 2017. 

US high-cost producers are slowly beginning to change their focus from cutbacks and capital preservation to expansion. For this to happen, however, we probably need to see prices stabilise at current levels for a period of several months. With the relative resilience witnessed in the fracking industry during the latest slump, the industry may also spring a surprise when it comes to its ability to stabilise and eventually increase production. 

Producers of WTI crude oil are now able to hedge their 2017 production above $53/barrel following the recent extension. The number of oil rigs, meanwhile, rose by nine last week which is only the second weekly rise seen this year. 

Production, rigs and cal-17 price

After spending the past couple of weeks consolidating below $50/b, WTI settled above this point yesterday for the first time since last October. Prior to the break higher, it had been bouncing off trendline support – currently at $49.26/b – for the previous four days. This line is rising by $0.33/day and a break below is now required before any signs of profit-taking emerge. 

After breaching the October high at $50.9/b earlier today, the next resistance can be found at $51.8/b.

The RSI is telling us that WTI crude oil is now at its most overbought since February 2014 but while positive momentum exists and fundamental news remain supportive, these developments are likely to be ignored. 

WTI crude oil, first month cont.
Source: Saxo Bank
US inventory report to be released at 14:30 GMT (calendar link)

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank 
matsuri matsuri
oil is breaking through the wedge, all the forecasts for oil are not worth a penny since it is impossible to predict the reaction of, for example, US shale producers. What about longs added near 50 and above? if anything happens the correction will be steep...
Ole Hansen Ole Hansen
US EIA inventory report just out: US crude oil inventories fell by 3.2M bbl in line with expectations. Cushing dropped by 1.4M bbl on reduced supply from Canada. Gasoline inventories rose by 1M against expectations of a 2M drop. Implied gasoline demand slowed while production rose by 10k bbl. WTI trading 0.3% lower
Ole Hansen Ole Hansen
First weekly rise in US production since March when it rose by 1k barrels
Ole Hansen Ole Hansen
Selected charts from the EIA inventory report
John Roberti John Roberti
Dear Ole, we have had a serious fear that the data would be bad and in fact they are not bad at all. We have a minimal increase in production while gasoline consumption is slightly declining! The other data are not really relevant: US can import and export and if US is decreasing oil stock that appears to me reasonable since stock is at maximum level ever experienced and somebody has to pay for stock charges.. Now, as you stated two days ago we have to determine what will be the theme (s) of the market and what they want to do with these figures your opinion would ne appreciated. By the way, Michael O Neill said yesterday that Canada oil sands production is resuming and could be expected to be at full by month end...
Ole Hansen Ole Hansen
Limited price reaction with commentators describing the report as neutral to mildly bearish
John Roberti John Roberti
dear Ole, if the "median commentators" are describing the report from "neutral to slightly bearish" it remains to define other themes that could influence the market? Last week, you were of the opinion that the WTI should correct to 47 or 45... do you see other themes that would not allow this price correction to happen? I believe Nigeria alone could not justify a further increase! The glut is still there with Saudi Arabia, Iran and Iraq, to name a few. May be you would prefer to reply tomorrow to evaluate better what reaction the market will really show? For the moment, it looks yoyo but slightly on the decline: minimum 50,69! if we were witnessing a closing tonight below 50,30, could we consider the correction possible?
matsuri matsuri
it seems that no one is short in oil at the moment (oil at 51,52!!!) ...only longs what with any trigger could cause steep correction...there are opinions that the market is rebalancing. I do not agree with it. Asia is flodded with oil, USA will have shale producers coming to market, Canada after fires as well. I still see this as self-killing rally.


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