OIL Weekly: Time For Bullishness

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About: iPath S&P Crude Oil Total Return Index ETN (OIL)
by: Cristian Docan
Summary

US crude inventories build up marginally, following higher-than-normal refinery utilization rates.

Net speculative positioning updates for the first time of the year, but data is still too old to be exploitable.

Doubts on oil demand develops, but supply constriction upholds.

Introduction

Welcome to my Oil Weekly report. In this report, I wish to discuss my views on U.S crude markets. To do that, I used the iPath S&P Oil Total Return Index Exchange-Traded Notes (OIL), which tracks the performance of the S&P GSCI® Crude Oil Total Return Index, through direct investments in West Texas Intermediate (WTI) crude oil futures.

With a net asset value of roughly $300m, OIL is one of the most liquid oil funds, enjoying an advantageous tax status and benefiting from one of the lowest expense fees of the market, 0.75% per year. The ETN does not track directly spot prices and can therefore deviate substantially from it, due to variance in the shape of the futures curve over time, however, OIL seeks direct exposure to one-month crude future contracts and is an interesting short-term investment vehicle to get direct exposure to crude markets.

In this report, I analyze weekly crude oil storage levels published by the Energy Information Administration (EIA) and Commitment of Traders report developments, released by the Commodity Futures Trading Commission (CFTC) in order to assess investor and speculator sentiment on crude markets. Then, I identify key macroeconomic and geopolitical changes and the impacts on OIL shares.

Crude and petroleum stocks

Crude oil inventories in the US advanced marginally on the January 18-25 period, up 0.21% (w/w) to 445.9m barrels, whereas Cushing stocks declined 0.35% to 41.18m barrels. Despite US stockpiles lifting for the second consecutive week, crude seasonality eased over the week, establishing in a surplus of only 1.5% or 6 792k barrels compared to the 5-year average and 6.6% or 27 585k barrels above 2018 levels. Crude stock evolution remains for now neutral for crude futures and OIL shares.

Source: Historic Stocks of Crude Oil Report – EIA

With this slight inventory enhancement, the five-year crude stock spread advances moderately, up 5.41% to 9 749k net long barrels, indicating that crude oil markets are still oversupplied and thus that crude prices could be prone to a fresh pullback.

Source: Weekly Stocks of Crude Oil Report - EIA

In the meantime, refined petroleum stocks declined concurrently. Indeed, during the considered period, gasoline inventories weakened 0.86% to 257.4m barrels, whereas distillates dipped slower, down 0.79% to 141.3m barrel, amid sluggish refinery utilization rates, which established at only 90.1%.

Source: Weekly U.S Refining Utilization Rate

In the interim, US crude oil balance slightly rebounded, following slower US oil exports down 4.47% to 1.94m barrels, which were offset by a vigorous decline in net crude imports, down 16.52% to 5.14m barrels.

Source: Weekly Imports & Exports Report - EIA

That being said, oil production on the continent flattens at 11.9m barrels for the third consecutive week, despite rough winter weather conditions. However, current record high output levels is likely to be pressured in the coming weeks, given that latest Baker Hughes oil rig count indicates a strong working oil rig dip on the January 25-February 1 period, which brings positive winds on crude futures and OIL shares.

Source: Baker Hughes Rig Count Report

In the meantime, OIL lifted slightly, 1.87% to $6 per share, following a confluence of factors.

Source: Bloomberg

Speculative positioning

Latest Commitment of traders report published by the CFTC last Friday is still outdated and it will take at least one month for the data to be updated. Nevertheless, latest net speculative positioning on the December 18-24 period, indicate weakening bets on crude oil, down 1.06% to 306,312 contracts, which has mainly been due to short accumulation, up 1.71% to 196,407 contracts.

Source: CFTC

Meanwhile, fresh data provided by the CME group on the January 28-February 5 period, shows that open interest on crude futures advanced marginally, up 0.88% to 2,057,061 contracts. With recent appreciation of oil, open interest advance is positive for crude markets, indicating that speculators are starting to build a long position that will likely propel OIL shares.

Doubts on oil demand develop, but supply constriction upholds

Since my last article, OIL advanced 1.87% to $6 per share, indicating that crude oil market are slowly tightening.

Despite announcing a possible deal with China, US President somewhat disappointed investors in his State of the Union speech, following the lack of news on the subject and the negotiation advancement. Furthermore, stalling Eurozone business expansion brought new worries on Tuesday, amid signs of weakening manufacturing activity, leading to downward growth revisions in Germany and Italy. This along with weakening growth prospects in China could further hurt global oil demand. In front of that, OPEC+ producers’ commitment to soak up the global supply glut and rebalance the market seems to slowly reaching its objective, which is visible in recent price prop up.

The dollar index (DXY) measuring the greenback’s value against a panel of major currency, advanced moderately over the week, following rumors that trade negotiations between the two giant economies, namely US and China are progressing. This has limited the advance of crude oil futures and OIL shares, given that it makes foreign oil purchases costlier.

Source: Tradingview

Meanwhile, the contango on WTI crude future curve amplifies on short-term deliveries displaying a growing crude market oversupply, which is bearish for OIL shares. However, the persistent flattening of long-term crude future indicate investor sentiment indecision.

That being said, I maintain my bullish bias on OIL shares and I believe that the black commodity rally is close by.

I look forward to reading your comments.

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.