Crude oil: US to accelerate SPR drain? OPEC+ won't move needle

The result of all these being a market were traders lack conviction and where raised margin calls and a misfunctioning physical market has left normal trading/hedging strategies challenged. High volatility reduces trader conviction and their ability to hold onto a strategy, and the result has been a sharp reduction in the number of open positions held in key energy futures from crude oil and products to European gas. Excluding the latter the open interest across the five main oil and fuel futures contracts has slumped to a seven-year low.

Having spent the past five weeks within a 96 to 136-dollar range, raised but yet illusive hopes for a peace deal between Russia and Ukraine as well as the mentioning reduction in Chinese demand have all helped steer the price back down towards the lower part of that range.

Overnight the price dropped by an additional $5 per barrel in a matter of minutes with Brent touching $107 per barrel on news the Biden administration is considering a plan to release a million barrels of crude oil a day from Strategic Reserves for several months, to combat rising inflation and to offset losses from Russia. A release of this magnitude, potentially lasting for six months would go some way to minimize to risk of even higher prices, but it does not solve the long-term structural problem where lack of investments will make it difficult to increased production by the +5 million barrels a year that is needed to maintain global production at current levels.

In other oil related news, OPEC+ meets virtually today and without addressing slumping exports from Russia they are likely to rubberstamp an already agreed but increasingly impossible to achieve increase of 432k b/d, higher than the usual 400k due to fine tuning of individual nations production quotas.

In our soon to be published outlook for the third quarter we highlight the reasons why Brent is likely to trade within a 90 to 120-dollar range, now subject to an adjustment should the SPR released be announce, potentially as early as today. In the short-term, Brent weakness below the 21-day moving average for a third day signals loss of momentum with the next support being the $101.50 to $102 area.