Crude Oil in Super Contango as Glut Persists, Don’t Go Bottom Fishing Yet

Witawat (Ed) Wijaranakula, Ph.D.
Thu Nov 26, 2015

The spot WTI crude oil price has risen 4.2% since its close on Friday, after Saudi Arabia pledged on Monday to work on price stability, and Tuesday's shoot down of a Russian warplane by Turkish fighter jets near the Syrian border causing middle-east tensions to increase. The crude price jumped 1.29% on Wednesday alone, to close at $43.20 per barrel, after the U.S. Energy Information Administration (EIA) said that U.S. commercial crude oil inventories rose to 488.2 million barrels, up 961K barrels in the week ending November 20. Analysts had expected an inventory build of 1.2 million barrels. 

Traders and hedge funds covered short positions before U.S. markets closed for Thursday's Thanksgiving holiday, said Reuters. Many traders suspect that rallies, if any, will be rather short-lived.

The EIA said stockpiles at Cushing, Oklahoma, the delivery point for WTI futures and the biggest U.S. oil-storage hub for WTI futures, rose by 1.74 million barrels to 58.6 million barrels, approaching the April 17 peak level of 62.2 million barrels. Total storage capacity for the site was 71.4 million barrels as of March 31, according to the EIA.

Excluding the Strategic Petroleum Reserve (SPR) of about 695.1 million barrels, U.S. crude oil inventories remain near the peak level of 490.9 million barrels set in the week ending April 24, 2015. On Tuesday, the American Petroleum Institute (API), an industry group that represents about 400 oil and natural gas corporations, said its crude oil inventory data for the week ended November 20 showed a build of 2.6 million barrels, while stocks of crude at Cushing were up 1.9 million barrels.

According to Societe Generale SA analysts in a Bloomberg report last week, the crude oil market is in contango and it isn’t going away anytime soon due to shortage of storage capacities and a rise in storage costs. Contango refers to a situation where the front-month or near-term futures contract are trading less than or at a discount to longer-dated futures contracts, as traders are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity. The higher the spread move, the wider the contango. In tightly-supplied markets, when crude oil prices are strong, that spread value is the complete opposite.

We expect the U.S. crude oil inventories to continue to build as the glut persists, and the demand for heating oil in the northeastern U.S. to diminish due to the warmer winter temperatures that the El Niño weather pattern brings. According to Reuters, shipping data shows that about 40 oil tankers with nearly 20 million barrels of Iraqi oil are due to sail to the United States in November, almost 40% above the amount booked to arrive in October. At some point in time, this crude oil will show up in U.S. inventories.

The state-controlled oil producer Petróleo Brasileiro SA, said on Monday that a three-week-long strike by Brazilian oil workers appears to be winding down after the majority of the unions agreed to resume work. According to The Wall Street Journal, the production is now “normalizing” and the company expects to maintain its 2.125 million barrels a day of oil production for 2015, Petrobras said in a statement.

As of November 17, there are 275,013 long positions of light sweet crude oil futures, traded on the New York Mercantile Exchange (NYSE) by managed money or hedge funds, a decrease of 7,775 long positions from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. 

This is compared to about 154,181 short positions, an increase of 16,246 short positions from the previous week where light sweet crude oil contracts are traded in units of 1,000 barrels. Hedge funds have increased their net short positions by about 24,021 contracts, as they are betting that the crude oil price could go lower.

From our near-term technical viewpoint, the crude oil price has been moving in a bearish lower low chart pattern, meaning every low (L) is lower than the previous low. In order to establish an uptrend, the crude oil price needs to break out and stay above the November high of $48.36 per barrel level. There are walls of resistances between the current price and that November high, though.

A headline risk is the Governing Council of the European Central Bank (ECB) meeting in Frankfurt on December 3. The ECB could announce the expansion and extension its 1.1 trillion euro bond-buying program. The move could bump up the U.S. dollar against the euro and put even more selling pressure on crude prices. 

Other events that could influence the price of crude oil are the U.S. nonfarm payrolls report for November to be released by the Labor Department and the meeting of the OPEC ministers in Vienna, both on December 4. The OPEC meeting could be a non-event, as Russia’s Energy Minister Alexander Novak told TASS that Moscow has not yet received an invitation to the OPEC meeting but is ready to take part in it.

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