OIL Weekly: Is Bear Momentum Catching A Break

OIL Weekly: Is Bear Momentum Catching A Break

Introduction

Welcome to my Oil Weekly report. In this brief report, I wish to discuss my views on oil markets and the iPath S&P Oil Total Return Index Exchange-Traded Notes (OIL).

OIL replicates the performance of its sub-index, the S&P GSCI® Crude Oil Total Return Index, which invests directly in West Texas Intermediate (WTI) crude oil futures. Issued by Barclays Bank PLC, OIL is riskier than ordinary unsecured debt securities, given that it has no principal protection and that it is contingent to the creditworthiness of the issuer. With an expense ratio of 0.75% per year, the expense fee is slightly cheaper than other oil commodity funds. OIL is a decent short-term investment vehicle to get direct exposure to one-month crude oil future contracts. 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. With a net asset value of $395.5 m, OIL is one of the most liquid oil funds on the market and enjoys an advantageous tax status, because the capital gains are taxed at the long-term capital gains rate, only when the ETN shares are sold. Thorough

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

Crude and petroleum stocks

According to the latest EIA report, U.S oil stockpile advanced 1.52% (w/w) to 422.8m barrels on the October 12 – 19 period, while Cushing storage climbed 4.79% to 30m barrels. With this fifth consecutive increase, oil inventories settle just 1.2% or 5 187k barrels below the five-year average, but are still 7.6% or 34 554k barrels under the storage level registered a year ago. For the time being, U.S stocks remains supportive of OIL shares, but the momentum might quickly change, if the storage buildup continues.

Source: EIA

In the meantime, the five-year crude stock spread pursued its advance and is now short of only 8 124k barrels on the October 12 – 19 period, providing a negative bias for crude futures and OIL shares.

Source: EIA

Over the week, refined petroleum inventories declined, amid slow refining working rates (89.2%). On that basis, gasoline (w/w) stockpiles curved in 2.06% to 229.3m barrels, whereas distillates lost 1.71% to 130.4m barrels.

Meanwhile, U.S oil balance faintly improved, following superior exports records during the week. Indeed, while oil exports jumped 22.8% (w/w) to 2.18m barrels, net imports slowed 5.74% (w/w) to 5.5m barrels.

Source: EIA

Concomitantly, U.S crude output steadied to 10.9m barrels for the second consecutive week, even though there was four additional oilrigs brought online during the period. For the coming week, oil production will likely maintain its current rate, given flattish Bakers Hughes report.

Source: Baker Hughes

In the interim, OIL plunged 5.54% to $7.98 per share, following escalating trade war rumors and growing reluctance from top oil customers to cut Iranian imports.

Source: Bloomberg

Speculative positioning

According to the latest Legacy Commitment of Traders Report (( COTR)) released by the CFTC on October 9 – 16 period, oil net speculative length on Nymex futures plummeted 7.69% (w/w) to 455 278 contracts, whereas OIL shares dipped 9.57% to $7.94 per share.

Source: CFTC

The robust dip is attributable to both strong long liquidations, down 4.72% (w/w) to 585 412 contracts and climbing short speculative bets, up 7.38% to 130 134 contracts. With this fifth consecutive net speculative length dip, OIL’s bullish momentum is slightly fading and should continue to do so given recent U.S storage builds.

Since the beginning of the year, net speculative bets on crude contracts fell 27.06% or 168 935 contracts, whereas OIL YTD performance weakens 20.67% to $7.94 per share.

Despite pursued downside risks in the oil markets, OIL is set to hold losses.

Since my last article, OIL loss accelerate, down 5.54% to $7.98 per share, amid a confluence of factors. First, American crude inventories are set to post the longest streak of increases since March 2017, despite forthcoming Iranian supply sanctions set to come into effect early next week. Second, net speculative positioning and open interest on NYMEX crude futures are in freefall, indicating that the market is not convinced that Washington’s call to end Iranian oil purchases will materialize. Furthermore, three of Iran’s top crude consumers, namely India, China and Turkey, are reluctant to cut Iranian oil imports, arguing that there are not sufficient supplies to replace them. That should weigh on oil prices, along with intensifying trade tensions between the U.S and China, which are set to apply another round of tariffs if the next G20 summit in Buenos Aires yields no progress.

In the meantime, the spread between the two main oil benchmarks loosened from $9.49 to $10.01 per barrels on the October 16 – 23 period, following five consecutive U.S oil inventory expansions.

Concomitantly, the dollar index (DXY) continues to strengthen against a panel of major currencies, bringing turmoil to emerging markets, weakening international oil purchase power and thus harming OIL shares appreciation.

Source: Tradingview

WTI futures backwardation slope steeply corrected and trade in contango on nearby maturities, suggesting that investors have digested Iran’s upcoming oil export sanctions and that the reversal might be near. However, global oil demand remains strong, whereas aggregate global supply remains ample despite multiple soft spots lingering in major producing countries: Nigeria, Libya, Angola and Venezuela. That being said, for the time being, WTI backwardation remains supportive of OIL shares and it should not come as a surprise to witness another bullish move in the coming weeks.

Given the mitigated signals provided by the crude markets, I expect OIL shares to evolve in horizontal range for the coming week and maintain my long-term bullish bias for the crude futures.

I look forward to reading your comments. If you enjoyed the article, thanks for showing your support by following my account or sharing the article.

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.