Market Refuses To Believe The Bullish Draws

by: HFIR

Money manager long positioning is matching the previous low in December just as we enter the heart of the U.S. crude storage drawdown season.

The market is refusing to believe that bullish U.S. crude storage figures is coming, while our data suggests otherwise.

Crude imports are going to be significantly lower than last year with our data showing imports to average ~6.8 mb/d for July and possibly lower in August. Jorge's data shows-(6.6-6.7).

This combined with strong refining margins globally means throughput is bound to increase pressuring crude storage lower.

In summary, the combination of bearish market sentiment with bullish fundamental data makes the risk/reward very asymmetric to the upside.

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Note: This article was first published to HFI Research subscribers last Saturday. For more info, see here.

The market remains skeptical of the bullish U.S. crude storage draws that's coming. That's why WTI remains below $60/bbl and CTA long positioning is near the lows.

This is extremely comforting to us because the market is being rather silly not pricing in any potential storage draws into the price. And if we broke down the positioning, it just appears to be an exodus of longs.

For WTI, long positions are near the lows we saw in December. But is such a bearish view from the market really warranted?

No, because the same thing that faked us out last year (higher Saudi exports to US) is reversing itself on its head this year (lower Saudi exports to US).

Based on what Jorge is seeing on the vessel end, his figures show U.S. crude imports to average closer to ~6.6 to ~6.7 mb/d. Based on all the incoming vessels we see on the water right now, we have July U.S. crude imports at ~6.8 mb/d and preliminary August imports at ~6.2 mb/d (will be revised higher).

This means that as July goes along and if we don't see an immediate spike-up in vessels to the U.S., U.S. crude imports in August will be extremely low just when refinery throughput and U.S. product demand is at its highest.

Keep in mind that U.S. crude imports averaged slightly over ~7.9 mb/d for July, August, and September last year. U.S. crude exports have increased enough to eliminate ~80% of the increase in U.S. oil production y-o-y, so any drop in U.S. crude imports y-o-y will apply meaningfully to U.S. crude storage balances.

Another variable that the market ignored is the fact that U.S. refinery throughput disappointment has really been the main reason why U.S. crude storage isn't lower.

According to our estimate, refinery throughput, had it matched our expectations, would have pushed U.S. crude storage below 2018 levels already. In reality, the unplanned outages have helped push the 3-2-1 crack spread the multi-year highs for this time of the year and the PES refinery shut-down has boosted global refinery margins.

All this means is just a lower planned maintenance season in Fall. In addition, with IMO 2020 coming, refinery throughput globally would have to rise meaningfully to supply the LSFO demand. This means the 2nd half of the year will show steep crude storage drawdowns. The big question would then be - if throughput spikes, will end-user demand hold up?

That will require margins to not collapse. If refinery margins hold-up despite record throughput, then the strong crude storage drawdowns will continue.

In summary, the low money manager position combined with what we are seeing via vessels on water lead us to one simple conclusion - the market is not pricing in ANY bullish U.S. crude storage draws that's coming. This makes the risk/reward extremely favorable to the upside. And with long positioning in WTI matching the previous low in December (when WTI was $45). We think when the CTAs do return and buy oil in droves, it will drive up prices even higher than before. Our view is that the next round of CTA flooding into the market could push WTI back to $70+.

What will drive them back into the market? The bullish U.S. crude storage draws.

Disclosure: I am/we are long UWT. 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.