Commodities 5 minutes to read

WTI tests $60/b as funds step up buying on dovish FOMC

Ole Hansen

Head of Commodity Strategy

Summary:  The latest EIA report showed a rise in stocks, sending prices a tick below the $60/b level in the immediate wake of the release.


For the fifth day out of the last six, WTI crude oil (CLK9) was once again challenging the psychological important $60/barrel level ahead of the Weekly Petroleum Status Report from the US Energy Information Administration at 14:30 GMT. 

Production cuts from the Opec+ group of producers have been the main reason for the dramatic recovery since the 38% price slump during the final quarter last year. In fact the recovery has been so strong and swift that WTI is currently heading towards its biggest quarterly gain – currently 32% – since Q2 2009 when the recovery from the global financial crisis saw it jump by more than 40%.
This week, the market seems to have caught a fresh bid from macro-focused funds who, despite the recessionary signals from an inverted yield curve, have concluded that the dovish tilt from the Federal Open Market Committee have reduced global growth risks. With that, the risk to future demand growth has been reduced and these developments have supported a bigger exposure in crude oil.

The pull from funds primarily speculating at the front of the curve has supported a jump in the Brent crude oil prompt spread to $0.6/b backwardation while the contango in WTI crude oil has been reduced to -$0.16/b. 
Supply side worries related to news that Russia have put boots on the ground in Venezuela and a continued drop in the US rig count have also provided the support which overall makes the energy space a very lonely place for those holding a negative view on the market.

The biggest short-term risk to the oil market is likely to be driven by renewed stock market weakness as it would help erode the recent pick up in risk appetite, particularly considering that the fresh addition of 124 million barrels during the past month up until March 19 has brought the total net-long to 505 million barrels.  

WTI crude oil is currently trading in the middle of a $57.70/b to $61.6/b range. The weekly inventory report highlighted below initially sent the price of both oil and products lower by 0.5%. 
Source: Saxo Bank
The Weekly Supply and Demand Estimates report from the Energy Information Administration confirmed the first weekly return to the seasonal trend of rising crude oil stocks in three weeks. The 2.8 million barrels increased was supported by a small 114k barrel/day increase in imports as well as a counter-seasonal drop in refinery demand of 367k b/d. The latter was primarily due to a spate of fires and other upsets which hit Gulf Coast refineries during the week in question. Imports from Venezuela, meanwhile, were a round zero for the second week in a row. 
The charts below show this week's EIA data:
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