UPDATE: Crude plunges on bearish stocks report

Ole Hansen

Head of Commodity Strategy

UPDATE: Crude oil and products continue lower following a bearish EIA report. Crude oil stocks jumped by 6.8m barrels due to a 1.3m b/d pick up in net imports.

Support came from continued strong refinery demand which reached a record 18m b/d. Stocks at Cushing rose by 1.6m barrels, the first rise in 13 weeks while production was adjusted higher by 100,000 (rounding) to 10.9m b/d.

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Following a short-lived relief rally yesterday crude oil has once again turned lower in sympathy with industrial metals. Both commodity groups are under pressure over concerns that the current trade war between the US and China, as well as the Turkish crisis, will spread to other emerging market economies. 

In order to understand why crude oil has been left more exposed to an EM slowdown than before, we need to look at demand growth. According to the IEA via Bloomberg, some 50% of global demand growth in 1999 was driven by non-OECD countries. Today this percentage has risen to 87% and it highlights the current risk to demand from key consumers as their currencies continue to weaken against the dollar. 

Brent crude is once again testing what looks like key support at $71/barrel. 
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Source: Saxo Bank
We call it key given the current speculative position held by hedge funds. In the week to August 7, crude oil was sold again with the 27,000-lot reduction in Brent and WTI taking the net-long down to 732,000 lots, the lowest since October. While cutting longs, however, traders remain unprepared for a potential drop below key support. 

The combined gross-short in Brent and WTI at 71,000 lots is close to the lowest seen during the past five years. This as the fear of supply disruption up until now have weighed harder than the risk to demand from trade wars and the recent increase in supply. 
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Source: Bloomberg, Saxo Bank
Up next at 16:30 CET we have the Weekly Petroleum Status Report from the EIA covering changes in stocks, production and trade. Some of the weakness seen today has been contributed by the fact that stocks at Cushing, Oklahoma, could see their first weekly rise in 13 weeks. This is according to the American Petroleum Institute who as per usual released their data last night. 
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