Crude Oil Price Fails To Hold Momentum From Best Week of 2017

Fundamental Forecast for USOIL:Bullish

Talking Points:

• Oil market is demand driven this summer as evidenced by 1-week avg. gasoline demand record
• Bullish momentum stalls in energy market and USD finds life on solid NFP
• Oil calendar spreads shifting from Contango to Backwardation favoring falling concerns
• Per Baker Hughes, US Oil Rig count falls by 1 rig to 765 total active US oil rigs
• IGCS showing increase in retail short oil positions, contrarian view suggests prices rise further

If supply will not come down or does not fall as much as desired, demand will need to rise. Early in the year, that did not seem like a recipe for success as global demand was not showing the signs of life that it has at late, thanks in large part to China. However, we are in a demand driven market, and that seems to suit Oil fine.

On Wednesday, the EIA Crude Oil Inventory report did not show the expected draw of supplies, though a drop of 1.53m barrels did occur against expectations of a 3m barrel draw. However, the story and key takeaway was in the demand for oil products like Gasoline. The one-week average gasoline demand pushed to a fresh record high of 9.84m barrels a day. Of course, seasonality plays a large part in this, but we’re also seeing record gross oil inputs from refiners (who turn Oil into gasoline) of 17.77m barrels a day. Wednesday’s Crude inventory draw was the fifth successive weekly draw.

Another positive sign witnessed this week on the supply and demand picture is that year-on-year supply fell for the first time since 2014 this week. This is a healthy sign that bloated inventories of crude are falling against the same time a year ago. Much of this can also be blamed on stronger seasonal demand, which is likely to fall over the coming months.

New OPEC actions and oil product demand is helping the energy market.. Click here to see our Q3 forecast on what outcomes we're watching!

On the price chart below, you can see that Crude Oil price broke above the chart resistance and bearish price channel that has framed price action for most of 2017. We will look for the price to hold above $47/bbl in WTI to validate that there is bullish momentum that could keep price supported near and above $50. One development in the options market that could produce a price ceiling is the sharp spike in put positions. Puts are options that give the buyer a right to sell at a higher price and are popular among producers. Therefore, if major drillers are amassing hedges, it could act as a price ceiling that will make the lower half of $50/bbl hard to crack.

Crude Oil price holds above strong resistance from confluence of levels near $48.20

Chart Created by Tyler Yell, CMT

Next Week’s Data Points That May Affect Energy Markets:

The fundamental focal points for the energy market next week:

• Monday: OPEC/non-OPEC Joint Technical Committee meets in Abu Dhabi to discuss compliance with oil-output cuts
• Tuesday 4:30 PM ET: API weekly U.S. oil inventory report
• Wednesday 10:30 AM ET: EIA Petroleum Supply Report
• Fridays 1:00 PM ET: Baker-Hughes Rig Count at
• Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts

Crude Oil IG Client Sentiment Highlight: Contrarian view suggests rise in price holds

The insight derived from this sentiment analysis on Oil is that traders are increasing their short exposure (red line on bottom half of chart) while reducing their long coverage despite recent gains. Considering this, the sentiment picture favors further gains.

-TY