Will EIA inventory data confirm bullish price action?

Commodities 5 minutes to read

Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil has experienced a sharp turnaround in sentiment this past week. The rally has been driven by a combination of a recovery in gasoline demand as lock-downs begin to ease and optimism that production cuts are easing the supply glut. Later today the market will focus on the Weekly Petroleum Status Report from the US Energy Information Administration for data that can support the current positive momentum


What is our trading focus?

OILUKJUL20 – Brent Crude Oil (July)
OILUSJUL20 – WTI Crude Oil (July)
GASOLINEJUNE20 - RBOB Gasoline (July)
XOP:arcx – Oil & Gas Exploration & Production
XLE:arcx – Energy Select Sector SPDR Fund (Large-cap US energy stocks)

____________________________________________________________________________________________________

Crude oil has experienced a sharp turnaround in sentiment since last Wednesday when the ‘Weekly Petroleum Status Report’ from the US Energy Information Administration showed that a through in gasoline demand had been reached. Since then the July WTI crude oil futures contract has rallied eight dollars while reduced fear of another collapse to negative prices have seen the front month contract of June jump by 12 dollars.

Source: Saxo Bank

Adding to the turnaround in sentiment has also been numerous announcements of voluntary production cuts from producers outside OPEC+. The agreement by this group to cut production by 9.7 million barrels/day from May 1 and onwards has now begun. Reports from the major producers, such as Russia and Saudi Arabia have so far been promising but in order for the impact to be felt there will be no room for cheating this time round.

The ill-timed price war, just before the global meltdown in demand, that Saudi Arabia started last month, resulted in OPEC increasing production by 1.7 million barrels/day to $30.4 million last month (Source: Bloomberg production survey). The charts below highlight the challenge many producers now face in order to comply with the agreed voluntary cuts.

With the market constantly trying to gauge the global pandemics impact on demand it is now clear that some of the overly bearish forecasts, including those predicted by the International Energy Agency in their Oil Market Report for April, have been overly pessimistic. A 29 million barrels/day demand drop in April followed by 26 million in May, as the agency predicted, would have sent the level of global storage towards tank tops within weeks. Instead a speculative frenzy, both by retail and hedge funds traders have sent the price sharply higher in the belief that the worst is now behind us.

Whether true or not very much depends on many moving parts such as

- The speed with which global demand can recover and to what level compared with before
- OPEC+ implementing the cuts and maintain them in order to bring down the overhang of stocks
- The Covid-19 pandemic doesn’t mutate to resurface in a different format
- The price of oil not reaching levels where planned production cuts are scraped or new begin

Later today at 14:30 GMT the Energy Information Administration will publish its weekly status report on crude oil storage, production and trade. The American Petroleum Institute in their report from yesterday saw a bigger than expected rise at Cushing, the major storage facility with a capacity of 76 million barrels and delivery hub for WTI crude oil futures. Off-setting this was another weekly drop in gasoline stocks, something the market took as a confirmation demand from US motorist continues to recover.

The four major areas to focus on in today’s EIA report are the crude oil storage change at Cushing, total US refinery demand, motor gasoline supplied and not least estimates on production. Overall the current strong momentum in the market would require the report being somewhat worse than expected in order to trigger a turnaround.

As per usual I will be posting the results and charts into my Twitter feed here

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.