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.
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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.
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.
Source: Saxo Bank
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank