Oil Weekly: Bullish Sentiment Is Slowly Reversing

Summary

• U.S. crude storage marginally improved week-on-week and oil rigs declined for the first time in three weeks.
• Net speculative positioning is close to its historical high and future potential profit takers could weigh upon black gold uptrend.
• China’s response to U.S. tariff tarnished recent oil rally and deepening trade war rhetoric could disrupt global oil demand.

Introduction

Welcome to my Oil Weekly report. In this report, I analyze recent changes in oil inventories, based on the Energy Information Administration (EIA) estimates and net speculative positioning fluctuations provided by the Commodity Futures Trading Commission (CFTC). Then, I explore key global market and oil market developments to assess the impacts on the iPath S&P GSCI Crude Oil Total Return Index ETN (OIL).

Crude and petroleum stocks

According to latest EIA report, U.S. crude inventories posted a marginal build, up 0.38% (w/w) to 429.93m barrels on the Mar 16-23 period, following a surprising drawdown the prior week, whereas Cushing storage posted a healthy acceleration up 6.13% (w/w) to 31.23 m barrels. Although, the U.S. recently became the second largest crude exporter, domestic storage establishes slightly below the 5-year average, which is bullish for OIL shares.

During the week, the five-year U.S. crude oil storage spread accelerated to 6927.44k barrels, indicating that the U.S. oil market is moving slightly more toward an oversupply structure.

Source: CFTC

On the refined products side, inventories dropped for the fourth consecutive week. Gasoline storage slipped 1.43% to 239.6m barrels, whereas distillates dropped 1.59% to 129m barrels. Refinery utilization rates continued to increase and establishing at the upper range of the 5-year average or 92.3%, amid recent oil price rally.

Meanwhile, net imports posted a healthy increase, up 19.37% to 6.57m barrels, following declining inventory buildup and was marginally offset by U.S. export increase, up 0.32% to 1.58m barrels.

Source: EIA

On March 16-23 reported period, U.S. oil production was marginally up 0.25% (w/w) to 10.43m barrels and General Electric's Baker Hughes energy services firm announced that the number of drilling rigs declined by two to 993 last week. This has been the first fall in three weeks and might provide slight support for OIL going forward.

Source: Baker Hughes

Meanwhile, WTI dipped 3.5% to $63.46 per barrel, amid surging commercial tariff spat, rumors on declining Middle East oil price exports and profit-taking movements.

Source: TradingView

Speculative positioning

According to the latest Legacy Commitment of Traders Report ((COTR)) released by the CFTC for the March 20-27 period, crude's net speculative length posted a moderate acceleration, up 1.71%, from 703 708 to 715 770 contracts and is closely approaching the historic high established in the beginning of February 2018. Concomitantly, WTI front month price rose 2.91% to $64.67 per barrel.

Source: CFTC

Net speculative positioning progress comes on the back of long speculative accumulation, up 3.77% to 854,255 and is partly offset by steep short builds, up 15.91% to 138,485 contracts. Short accumulation growth is at a year high and might indicate that oil momentum is reversing. Indeed, large concentrations of positions on either side of the market typically precede trend reversals and holders of existing longs positions could curb oil's bullish trend once they realize some of their profits.

Since the beginning of the year, WTI's net speculative positioning advanced healthily, up 14.67% or 91,557 contracts, whereas North American benchmark climbed, 8.08% to $65.25 per barrel.

Rising commercial tariffs could disrupt oil demand and tarnish black gold's bullish trend

Since my last article, OIL dipped 3.29% to $7.06 per share, whilst WTI declined 3.48% to $63.46 per barrel.

Source: Bloomberg

WTI backwardation steepened on nearby maturities, indicating scarcity worries in the short term, amid recent macro developments.

Indeed, deepening trade quarrel between China and the United States increased uncertainty and might tarnish bullish oil sentiment. Indeed, on Monday, China increased tariffs by 25% on 128 U.S. products, whereas WTI dropped 3%, the steepest intraday dip registered since March. The plunge has been intensified by rumors that Saudi Arabia might cut prices for all crude grades that it sells to its Asian customers as of May, indicating that at current price levels, Saudi Arabia might be ready to secure long-term contracts and thus market share, whilst slowly considering its production cut exit strategy.

According to the New York Fed, oil demand steadied since the beginning of February, whereas supply slightly improved recently. However, the residual curve continued to accumulated gains, indicating increasing exogenous factors influence oil markets.

Concomitantly, 10-year U.S. yields dipped, from 2.76801% to 2.7589%, following pursuing equity risk off sentiment and trade war fears.

Source: Bloomberg

The dollar index remains under pressure compared to a panel of major currencies, due to U.S. twin debt deficit. Although recent tariff measures will likely reduce U.S. trade deficit, this will not happen overnight. However, I believe that recent dollar weakness is exaggerated and that even if trade war fears prevail in the near term, bullish greenback breakthrough will provide headwinds for OIL.

With U.S. inventories posting a marginal buildup, speculative length close to its historical high, and deepening commercial tensions between the U.S. and China, OIL failed to overcome its latest top of $7.46 per share and is now positioned for a correction. Even if, oil backdrop remains bullish in the long term, black gold weakness might persist until the $66 per barrel resistance level is not broken.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.