Relief rally and saber rattling, but bearish selling pressure is set to return

SEB - Prognoser på råvaror - Commodity

Oil contracts are having a 10% relief rally today as Monday’s price crash moves away. It was predominantly the small investors who lost their shirts and not the professionals. Market now feels it has good time to exit long positions in the WTI June contract and thus avoid a repeat of Monday when the June contract is set to expire. The relief rally is helped by Trump’s saber rattling with Iran but that is a sideshow in our view. The oil market is still running with a solid surplus and inventories are building by the day. Bearish selling-pressure is likely to return and longs in the WTI June contract should not be too comfortable.

The Brent crude June contract is trading up 10% this morning at $22.4/bl which is an increase of 40% versus the low point for this contract yesterday at $15.98/bl.

Bjarne Schieldrop, Chief analyst commodities at SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

It is now becoming clear that it was all the small investors who have rushed in and placed their money in long oil ETFs who lost their shirts on Monday. The professional oil traders however know what to do and took home the victory and cashed in on the event.

The crash on Monday was a combination of technicalities (if you take a WTI contract to delivery you get physical delivery), close to full inventories in Cushing Oklahoma and financial positioning in the run-up to the very last days of the existence of the May contract.

The market is now trading higher in relief knowing that it is almost a full month until the WTI June contract is set to roll off. This gives the market plenty of time to exit this contract long before we get to the very last day of trading on 19th May. I.e. the market will avoid a critical squeeze for the June contract on the 18th and 19th of May comparable to the one which pushed the WTI May contract to minus $40/bl on Monday.

The open position in the WTI June contract stood at 582 million barrels at the end of Monday. Since then there has been an exit of almost 100 million barrels per day. So, at the end of yesterday the open position was reduced to 382 million.

When the WTI May contract started trading Monday morning there was still an open position of 109 million barrels, and it was an exit of 96 of these on Monday with no bids to be found which sent the May contract down to minus $40/bl.

The current 382 million barrels of open position in the June contract will thus be reduced to almost nothing in good time before the contract expires. But the exit is not going to be on a continuous declining path because it is to a large degree dictated by rule-based rolling of ETFs. The next major roll by oil ETFs is set to take place around the 8th of May.

The market now has a relief rally as it is likely to avoid a repeat of Monday’s event also happening for the June contract at least in terms of the most extreme parts of that event.

It is however important to remember what is underlying it all: A large surplus which is still running high. Inventories around the world thus continuous to fill up as we speak. This is making it harder and harder and more and more expensive to store the next surplus barrel every day.

The open June position has now been reduced to only 382 million barrels. It still feels like the long side of this open position is caught in a trap even with time on its hands. The exit of 200 million barrels in the June contract over the latest couple of days took place at extremely low prices and at extreme distress and inventories in Cushing Oklahoma are just getting fuller and fuller by the day.

While we are having a relief rally of 11% to $15.4/bl in the WTI June contract today it is still only trading $3.8/bl above its low-close on Monday of $11.57/bl.

Oil producers in the North Sea with still un-hedged June and July production might take the opportunity of the current relief rally to hedge their production with the June and July Brent contracts.

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