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Article / 08 August 2016 at 14:04 GMT

Short-covering boosts oil, but Q3 typically soft: Hansen

TradingFloor.com Team

TradingFloor.com Team / Saxo Bank

Denmark

WTI crude oil rises to $42.71/barrel, Brent climbs north of $45/b
US oil production has stabilised; Russian, Opec levels continue to increase
Third quarter typically a challenging one for crude oil: Hansen

By the TradingFloor.com team

Oil saw its third straight day of European-session gains today, with WTI prices rising from around $41.80/barrel to $42.78 as of press time (Brent prices climbed from just over $44b/ to just over $45).

In Saxo Bank head of commodity stategy Ole Hansen's view, today's main drivers have been "verbal intervention, the stronger-than-expected US jobs report on Friday, and the latest COT report that showed a strong buildup in short positions".

While Hansen reports that "the overhang of supply has not gone away, so short covering seems to be the main reason [behind today's rise]," he also notes that "while the net-long position in oil has been falling, both long and short positions have been rising... [this] does mean that longer investors are dipping their toes in again".

Click to enlarge:

Looking at the overall supply landscape, Hansen says that "US production has stabilsed while Opec and Russia continue to increase production, so we are seeing the rebalancing process once again delayed meaning lower prices for longer".

One factor Hansen sees as potentially challenging for WTI in particular concerns recent moves made by US shale oil firms. "US high cost producers have during the past few months had the opportunity to forward hedge their production above $50 and depending on the size of this hedging programme, this may lead to a greater resilience despite the renewed price weakness," says Saxo's commodities head.

While there is reason to believe that the current situation could see some support develop around $40/b, Hansen ultimately feels that "the third quarter tends to be challenging due to the seasonal slowdown in refinery demand, which tend to lead to rising inventories."

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank

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