Crude oil sees reduced war premium as demand slows

The charts above show how conditions have eased significantly during the past week, and it highlights the reason geopolitical premium buyers currently express a low conviction rate and are quick to exit longs on any signs of price weakness. Refinery margins, especially for gasoline, have fallen as we approach the low demand season, thereby reducing demand for crude as profitability falls. In a few days, prompt WTI and Brent spreads have more than halved, as supply fears ease. In addition, the premium medium-sour Dubai crude commands over light-sweet Brent has fallen to a five-week low at $1 per barrel from a recent peak above $4, another sign that market remains relaxed about the risk of a Middle East disruption.  

Later today, the EIA will release its weekly crude and fuel stock report and given the (high) frequency of this report, it normally attracts a great deal of attention from traders looking for fresh data to support their trading decisions. Last night the American Petroleum Institute released their report which, in line with EIA surveys, showed declines in all three, most notable a 4.2 million barrels decline in gasoline stocks. 

While the upside potential remains impossible to predict, the only thing we can be certain about is the existence of a floor beneath the market. Having fought so hard to support the price, and in the process giving up revenues, Saudi Arabia and its Middle East neighbors are unlikely to accept much lower prices. This leads us to believe support in WTI and Brent has been established and will be defended ahead of $80 and, barring any disruptions, the upside for now seems equally limited while the bear steepening of the US yield curve continues to raise recession concerns. With that in mind, Brent is likely to settle into a mid-80’s to mid-$90s range, an area we for now would categorize as being a sweet spot, not too cold for producers and not too hot for consumers.