Cristian Docan: Brace for bullish oil price spikes
This week, geopolitical risks are still the main drivers behind black gold markets
Oil Weekly report: In this report, I wish to discuss crude oil inventories and net speculative positioning changes, based respectively on the Weekly Energy Information Administration (EIA) report and the Commodity Futures Trading Commission (CFTC) estimates, to assess investor sentiment on oil markets. Then, I identify key global and oil market developments and their impacts on iPath S&P Crude Oil Total Return Index ETN (NYSEARCA: OIL ).
Crude and petroleum stocks
According to the latest EIA report, U.S crude inventories rose for the second consecutive week, up 1.45% (w/w) or 6.22m to 436m barrels on the April 20 - 27 period, whereas Cushing storage climbed 1.18% (w/w) to 35.78 m barrels. Recent stock increase grew significantly since the end of January, pushing crude inventory seasonality one-step closer to its 5-year average of 459.7m barrels.
Following EIA's inventory increase, the five-year US crude oil storage spread advanced further up, totaling 11622k barrels during the week, its strongest positive figure since the beginning of the shale revolution.
Meanwhile, refined inventories respective trends persisted. With gasoline stocks accelerating slightly, up 0.49% (w/w) to 238m barrels and distillates down 3.18% to 118.8m barrels, U.S mixed refined data do not provide a clear trend pattern. Indeed, even if refinery utilization rates slightly accelerated during the week, from 90.8% to 91.1%, gasoline and distillate inventories divergence carries on, respectively above 6079m and below 15399m barrels compared to the 5-year mean.
On the other hand, net crude imports accelerated slightly w/w, mainly due to declining U.S exports, down 7.85% to 2.15m barrels. Although U.S export have been ramping up since the shale revolution, pipelines constraints in the Gulf of Mexico prevail, whereas adequate port depths slow the loading of large carrying vessels (larger than 2m barrels).
In the meantime, U.S field production continued its slow increase, up 0.31% to 10.62m barrels, following accelerating Baker Hughes oilrig count. This trend is likely to continue in the near term, given high crude prices, which incentivize producers to accelerate drillings.
According to the latest Legacy Commitment of Traders Report (COTR) released by the CFTC for the April 24-May 1 period, crude net speculative positioning on Nymex dipped 3.05% to 690 727 contracts, losing ground for the second consecutive week. This does not seem surprising, given recent crude rally. Concomitantly, OIL slipped 0.77% to $7.69 per share.
Net speculative positioning dip is due to long liquidations, down 2.83% to 815,176 contracts, and is partly offset by short unwindings, down 1.6% to 124,449 contracts. After reaching record-long positioning in the previous weeks, recent steadiness might indicate rising uncertainty among investors, who are concerned about imminent U.S decision on Iran nuclear agreement.
Since the beginning of the year, net speculative length gain slowed w/w, but is still up 10.66% or 66,514 contracts, whereas OIL appreciated 16.87% to $7.69 per share.
Trump's pledge to quit Iran nuclear accord will propel OIL to fresh highs
Since my last article , OIL's rise slightly decelerated 2.82% w/w to $8.03 per share, but the ETF is trading at its highest level since 2016 and will likely continue to do so if President Trump's decision to break off Iran nuclear agreement materializes.
Indeed, geopolitical risks and tensions in the Middle East could deliver a wider OIL premium. The U.S take on Iran sanctions seems to be the key price-driver these days, and even if the market priced some of the upside, there is significant potential should the deal break off.
Besides, Israeli Prime Minister Netanyahu further bulled up oil markets, following its press conference in which he declared that his country had solid evidence that Iran had a secret program to build nuclear warheads. If we look back in the past, Trump's initial threats on NAFTA and climate change have not diminished since its election. I believe this time will be no different and that the market should brace for it. The late March visit of Saudi Arabia's prince in the U.S and indirect conflicts in the Middles East between Iran-Irak regional powers reinforces this postulate, which is positive for OIL.
Meanwhile, WTI backwardation accelerated on nearby maturities bringing additional tailwinds to OIL's bullish trend, whereas greenback acceleration steepened compared to a panel of major currencies, somewhat offsetting OIL's rise.
Therefore, this week, geopolitical risks are still the main drivers behind black gold markets, and if President Trump decides to exit Iran's nuclear deal, OIL will likely witness fresh highs.
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Disclosure: I am/we are long OIL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Cristian Docan: Part-time independent stock investor and currency analyst. I have a background as a Fund Manager Assistant and Junior Portfolio Manager in respectively an IPO dedicated hedge fund and an international electricity and gas company. I have been active for several years in the markets and I mainly focus on long/short investment ideas, high dividend growth stocks and currency momentum (linkedin.com/in/cristian-docan-11617a67) . Petroleumworld does not necessarily share these views.
Editor's Note: This commentary was originally published by Seeking Alpha, 05/08/2018. Petroleumworld reprint this article in the interest of our readers and does not necessarily reflect the opinion of Petroleumworld and its owners.
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Petroleumworld News 05/14/18
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