Head of Commodity Strategy
Summary: Crude oil has rallied close to 30% since early January when Saudi Arabia announced their unilateral production cut to support the market through the winter months of Covid-19 despair. As the market continues to tighten the call for even higher prices has continued to support demand, both from refineries and speculators enjoying the continued momentum. Next week's OPEC+ meeting is likely to set the tone into Q2 as they decide on whether to bump up production or seek even higher prices before the pick up in demand has stared to fully materialize.
What is our trading focus?
OILUKAPR21 – Brent Crude Oil (April)
OILUSAPR21 – WTI Crude Oil (April)
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Crude oil has continued higher since my last update with Brent rallying to a 13-month high above $65/b while WTI crude oil has extended its gains above $60/b and well beyond levels that could trigger a production response U.S. shale oil producers. However, any prospect for rising production has been put on hold following last week’s unprecedented polar blast which for a number of days cut production by close to 4 million barrels/day.
A development that has further helped reduce the overhang of global crude oil stocks with Morgan Stanley in a recent note seeing oil heading for what may be its tightest quarter since 2000. Goldman Sachs, one of the first banks to talk about the prospect for a new super cycle in commodities, meanwhile lifted it’s 6 months price forecast on Brent by 10 dollars to $75/b. The assumption being a strong post-pandemic pickup in global fuel consumption combined with non-OPEC producers struggling to add barrels while OPEC+ maintain a tight regime to support prices.
The combination of a colder-than-normal winter across the Northern hemisphere, Saudi Arabia’s unilateral 1 million barrels/day production cuts in February and March, and last week’s production cuts in the U.S. have all helped speed up the rebalancing process. Thereby rewarding speculators who steadfastly have increased bullish oil bets in recent months. In the week to February 16, the combined net long in WTI and Brent crude oil futures reached 737,000 lots or 737 million barrels, the biggest bet on rising prices since October 2018, but still some 350,000 lots below the March 2018 record.
Another measure, the ratio between long and short positions in Brent and WTI combined recently reached seven longs per one short. In 2018 it peaked at 15 to 1 before a major price correction saw it collapse to 6. Overall it highlights a market that has not yet run out of speculative buying, as long the short-term technical and/or fundamental outlook doesn’t change.
With this in mind, the market will be watching closely next week’s OPEC+ meeting on March 4 where the group will meet to discuss whether to provide more crude oil to the market from April and onwards. Back in December, the group decided to restore 500,000 barrels a day as part of the gradual process, that was paused in January, to push the remaining 7 million of withheld barrels a day back into the market.
The current bullish market behavior is sending a clear message to the group that a production increase is unlikely to hurt the current sentiment. While it may trigger a long overdue period of consolidation or even a mild correction, the bullish sentiment remains robust. Not least given the belief and strengthened by last weeks production cut that US producers remain focused on returning cash to shareholders instead of going on another cash-consuming drilling adventure.
The market will watch closely the group’s ability to reconcile the opposing views between Russia’s focus on market share and Saudi Arabia’s desire to drive prices even higher in order to better balance its budget. Having gifted the market and the group with a near 30% price jump since its early January one would expect that the Saudi’s hold most of the cards and that they will be able to dictate a path forward which is unlikely to upset the market to any large degree.
It’s Wednesday which means it is time for the Weekly Petroleum Status Report from the EIA at 15:30 GMT. At the time of writing the market has recovered to trade higher on the day. This following some price weakness overnight after an industry report from the American Petroleum Institute showed a surprise 1 million barrel rise in crude oil stocks. The first in five weeks if confirmed by the official report later where surveys point to a 6.5 million drop. The data covering the week to February 19 should also shed some light on the impact of the freezing weather in Texas, which cut both crude oil production and refinery activity. With this in mind gasoline and distillate stocks are both expected to have decline with EIA surveys pointing to drops of 3.5 million and 4 million barrels.
As per usual I will post results and charts on my Twitter profile @ole_s_hansen
Technical update on WTI crude oil from Kim Cramer Larsson, our technical analyst.
After a strong rally since November 2020 WTI crude oil is closing in on the next resistance level around $65/b. The risk of a correction, however is brewing and it could take the contract down to support at around $53.50/b. There is, however, room all the way down to around $46/b. More accurate levels can be determined once we have established the potential wave 3 peak in what appears to be a nice 5 wave longer term uptrend.
The likely corrective move could be wave 4 laying the foundation for the final 5th wave which, if unfolding is likely to see it test resistance around $75/b. However, a rally to as far as $85/b is not unlikely.
There is currently no RSI divergence i.e. no imbalance in the uptrend which indicates we can see higher WTI prices going into Q2 and Q3. Keep an eye on a bearish break of the upper trend line drawn on the RSI (light blue) for confirmation of the unfolding correction. The lower longer term rising trend line (dark blue) should not be broken, however. If that scenario unfolds a larger correction or even a down trend could be the outcome.
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