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 / 21 February 2017 at 14:31 GMT

Oil up on bullish noise from London IP week — #SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • Oil getting more expensive and attempting to break out of its recent narrow range
  • Bullish news from the current annual International Petroleum event in London
  • High Opec compliance during January has started balancing the market
  • In the US oil production is rising, some other states might increase supply, too
  • Given the current outlook for rising demand the market will eventually balance
There is a good chance that the oil price will increase further, 
but this move might take time. Photo: Shutterstock
By Ole Hansen

Crude oil is showing signs of life today and it is the upside which is once again being tested. The annual International Petroleum week in London has created a few bullish headlines but also shown why the short-term outlook continues to point towards a range bound market.

My colleague Kim Cramer Larsson highlighted in this update earlier how WTI crude oil is attempting to break out of the narrowing range we have witnessed during the past couple of months. While the technical aspect, i.e. the break above $54.15/barrel on US light crude CLc1, helped trigger an extension, it was soundbites and comments from the IP week which laid the foundation for this latest attempt.

In a key note speech at the conference Opec's Sec-Gen Barkindo said that only 100% compliance from Opec producers would be acceptable while also raising the possibility of other producers cutting production. He stressed the need for these cuts being implemented considering how high level of oil stockpiles continued to weigh on the market. 

Delegates at the conference were asked where they saw oil in a years time. Some 45% saw Brent crude within a $50 to $59/barrel range while 33% were more optimistic seeing it between $60 and $69. Our outlook falls in the latter range as well. But before we get there, we still see the oil market facing enough challenges to make an upside break difficult to achieve at this stage. 

Let us take a look at the current oil market status through a number of charts. 

High Opec compliance during January has started the process of balancing the market. From December to January total Opec production fell by 1 million barrels/day. Libya and Nigeria however both could possibly up production further. Libya has stated its intent of increasing production to 1.2 million b/d, up from 0.7 million b/d in January. Iraq has agreed to cut production to $4.35 million b/d but according to Bloomberg data they were still producing 4.5 million b/d during January.

Opec crude oil production
Source: Saxo Bank
In the US oil production is rising and according to research from Argus both the productivity per new well is going up while the break-even cost is coming down. So much that most basins now produce with a profit with WTI crude oil above $52/b.

US breakeven prices
These developments also help to explain the continued surge in the hedging activity among producers and merchants while new rigs have been added on a continued basis since last June. The gross-short position in the futures market from these participants continue to make fresh record highs with producers typically hedging forward prices one to two years out. 

Producer hedging
US oil production is approaching 9 million b/d after recovering from the mid-2016 low around 8.5 million b/d. Increased production and robust levels of imports have led to record inventories of both crude oil and gasoline. Crude oil inventories tend to rise seasonally until late April while gasoline inventories tend to peak out a few weeks earlier in March as refinery demand slows during maintenance. 

Last week's report sprung a surprise as it showed that the US had exported 1 million b/d of crude oil. If maintained it would almost neutralize the cuts seen from Opec so the coming reports will be watched closely to see it this was a one off or a new trend. 

US Petroleum status report

Two other opposing forces currently seen are gasoline margins and Brent prompt structure. The record overhang of RBOB gasoline has put refinery margins under pressure with the WTI-RBOB spread dropping below $10/b to a one-year low. Weak margins could trigger lower oil demand from refineries thereby increasing the crude oil inventory overhang further. Brent crude meanwhile is exhibiting all the signs that the Opec production cuts are working with the prompt spread getting close to backwardation after trading at contango since last April (see also this article).

Brent and gasoline factors
 Source: Bloomberg

Hedge funds are now holding a gross-long of more than 1 billion barrels. This in response to the strong belief that Opec will successfully manage to bring down global inventories which eventually will lay the foundation for higher prices  The net-long has hit 900 million barrels giving funds a massive exposure of this amount in dollars per $1/b price change. Reuters in this article discusses how Opec has given hedge funds a free put option as they have signaled their intent to support a $50/b price floor. 


Rising supply from US, Libya and potentially Nigeria is currently being met by a successful production cut by other Opec and non-Opec members. Given the current outlook for rising demand the market will eventually balance and the price move higher. But as the above data shows the road to higher prices may be longer than expected and during this time hedge funds will have to maintain their bullish belief in order to avoid disappointment which could trigger some aggressive long liquidation. 

In the very short-term the focus will be on today's attempt to break higher and as Kim wrote "If WTI closes above $54.15/b, another confirmation will be added to the bullish trend picture.
If, on the other hand, bulls lose their strength and light sweet crude oil drops back below $52.68/b, the lower rising trend-line will be tested."

WTI crude oil, first month cont.
Source: SaxoTraderGO

If you use twitter you can follow updates from the IP week by using #IPWeek and/or #OOTT

— Edited by Clemens Bomsdorf

Ole Hansen is head of commodity strategy at Saxo Bank

John Roberti John Roberti
Dear Ole, Thank you very much for your article as well as the two articles recommended: they give a very well informed picture of the risks currently involved in the oil market, particularly with the change in the cut off price for shale oil production in the US; thus the data of production will have to be scrutinized tomorrow. Prices have already come down by 50 cents since the top created by the news thus the break out may not hold???
Morris Morris
The shorts are at the all time low and the longs are at all time high on oil!!! Kennedy @ Elliott's wave talks about triagles and the graph support a breakout at the fifth wave withing the symmetric wedge pattern. Lets see what the outcome is!


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