• 5 minutes Covid-19 logarithmic growth
  • 8 minutes Why Trump Is Right to Re-Open the Economy
  • 12 minutes Charts of COVID-19 Fatality Rate by Age and Sex
  • 14 minutes China Takes Axe To Alternative Energy Funding, Slashing Subsidies For Solar And Wind
  • 3 hours WE have a suicidal player in the energy industry
  • 2 hours TRUMP pushing Hydroxychloroquine + Zpak therapy forward despite FDA conservative approach. As he reasons, "What have we got to lose ?"
  • 9 hours Washington doctor removed from his post, over covid
  • 58 mins Real Death Toll In CCP Virus May Be 12X Official Toll
  • 7 hours Shale Legs
  • 1 hour How to Create a Pandemic
  • 4 hours The Most Annoying Person You Have Encountered During Lockdown
  • 3 mins Saudi Aramco struggling to raise money for this year's dividend of $75 billion. Now trying to sell their pipelines for $10 billion.
  • 9 hours Which producers will shut in first?
  • 7 hours KSA taking Missiles from ?
  • 13 hours Trump eyes massive expulsion of suspected Chinese spies
  • 16 hours Did Trump start the oil price war?
Alt Text

The Inevitable Outcome Of The Oil Price War

Russia, with Saudi Arabia either…

Alt Text

Oil Crashes To 18-Year Lows As Inventories Build

WTI crude fell another 11%…

Alt Text

WTI Rallies 24% In Panic Stricken Markets

WTI rallied on Thursday for…

Brian Noble

Brian Noble

Brian Noble is principal with Financial Communications in Toronto, Canada which specializes in communications initiatives for the Canadian and global financial services industry. Brian Noble MA,…

More Info

Premium Content

What Happens To Oil Prices When Driving Season Ends?

“For now at least, it has become hard to risk capital on the price of oil with as much conviction as in the past.”—Andy Hall, famed oil trader, on shuttering his oil hedge fund.

If Andy Hall is confused, what does that say about the rest of us? This checklist tries to identify some of the anomalies in the global crude oil marketplace which presumably will ultimately get resolved even if they don’t seem to have any resolution at the moment. So here’s an oil watcher’s late August list of things to keep an eye on:

Brent versus WTI spread

At well over $4 and change, why is the Brent versus WTI spread so large, the largest since early 2015? Is it increased European and Asian demand as a result of more robust economic growth or weaker US demand and higher US production—or a combination or more precisely what combination of both?

From contango to backwardation

The October Brent futures contract is now in backwardation, while the corresponding WTI contract has seen its contango narrow significantly to just pennies per contract. In 2016, when WTI was trading around the same $47-48 level, the contango (note: not the spread) was as much as $4. Backwardation and/or a diminished contango imply quicker inventory depletion and consequently higher commodity prices. But in the present circumstances, what gives?

Price disparity

During the process described above, prices for WTI and Brent were actually falling while the Brent contract’s backwardation increased and the WTI contango narrowed. Changes to the term structure are generally regarded as the best future determinant of crude oil prices. What does this disparity tell us?

Inventories

Despite continued, significant weekly draws, crude oil inventory levels are still robustly high. While drawdowns have taken inventory levels well below 500 million barrels for the first time in months,YTD, crude oil inventories are down cumulatively just under 30 million barrels; interestingly, gasoline (down just under three million barrels) and distillates (down just under five million barrels) are barely negative (EIA data: This Week in Petroleum.) So should inventory levels prove to be more impactful on crude prices in 2017 than they were in 2016? Or is pricing still really just a function of the weakening US dollar, which is down by about 8% during this period? Related: Two Countries Could Push Oil Over $50

Global demand

Demand focuses on the paradox of declining Chinese and US demand and growing US production. On the latter front, yet another increase in US production last week amounted to 79,000 barrels per day according to the EIA. On the former, a Reuters story from earlier in the summer (China, India, Japan hamper Asia oil demand growth, efforts to balance market) quotes Michael Corley, managing director of Mercatus Energy Advisors: “We are indeed seeing lower demand from more than a few clients – air, marine, road, industrial … They are actually consuming less fuel than anticipated.” The three countries together account for about 20% of global demand.

OPEC

Has the world forgotten about OPEC? Reduced but nonetheless consistently robust production from OPEC at just under 35 million barrels per day along with falling compliance (currently reported at around 75%) puts the recent St Petersburg agreement in the spotlight and probably spells trouble. Does anybody have much faith in OPEC in any case?

Technicals

Trader interest in crude as measured by the weekly Commitments of Traders reports from the U.S. CTFC is in a declining trendline with the exception of the recent upward blip in trading activity (see chart.) The technical picture, however, continues to deteriorate even as crude has experienced a number of counter-trend rallies. Related: Kurdish Independence Could Deal A Major Blow To Oil Markets

Anomalies exist. And if one of the world’s greatest energy traders is calling it quits, it’s clearly time for caution (for more see: Are Oil Markets Becoming Untradeable?)

WTI Commitments of Traders 2016-2017

(Click to enlarge)

COT Net Positions

Commercials 
Large Speculators
Small Speculators 

The technical picture of futures trading activity resembles the technical profile of WTI itself—a series of lower highs and lower lows.

By Brian Noble for Oilprice.com

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage






Leave a comment
  • Citizen Oil on August 28 2017 said:
    Did you put the wrong title on this story ? No mention whatsoever about what happens to the oil price when driving season ends . LOL

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News