Yesterday the market was surprised by API Crude Oil Inventories that showed a strong build – the largest surge in a month. With crude inventories rising by 3.5mm barrels (when no change was expected), and with a very strong build on Cushing (of 1.46mm barrels, 0.36mm barrels above expected), oil traders were met with a surprise.
Ridge Capital Markets, on the other hand, was not surprised by these numbers. Today we will learn about the DOE figures, and we again expect strong crude oil inventory builds to be reported. While supply imbalances with oil under $50 may be forming in the horizon, they are not a problem today (and, if oil rises above $50, many shale producers and other expensive operations will be back online again, contributing to the supply glut and to cheapening oil once again).
It is known that Houston is yet to see many oil tankers unloading their oil load, which should keep pressures over storage, and weekly inventory builds, and the truth is that demand isn’t growing nearly as fast as it would have to, in order to keep up with supply.
In the short-term scenario, the fires affecting Alberta are directing themselves toward other regions, where they should not pose any threat to Canada’s oil production. Plus, yesterday, Saudi Arabia announced a “significant output growth”, Kuwait said that it would raise production levels to meet the goal of putting out 4 million barrels per day by 2020, and a Russian influential figure who is close to Putin basically said that there’s no hope for the OPEC to act as an industry regulation body that can establish agreed production limits.
Now take China out of the equation, with its decreased imports and with its purchases of oil beginning to wane, and you have a very bearish short to medium-term scenario for oil. At Ridge Capital Markets, we have been talking about these fundamentals for quite some time. And, even though the markets are still keeping oil at $44 for no reason other than self-reinforcing bullish market sentiment, fundamentals will ultimately speak louder, and should cause a sudden and very abrupt correction in the oil markets.
After all, oil couldn’t make it to $50, despite this bullish sentiment, and the horizon is only filled with bearish catalysts – not bullish. Oil traders would do well to pay attention to this, and to join the short side instead of the long. The same applies to currency traders, who can position themselves to gain from shorting oil currencies – which are already showing their weakness against the USD.
Finally, today we will learn about the Manufacturing Production (MoM) for March. That one is hard to predict, especially because the markets are now frequently responding positively to bad news, and negatively to good news. That’s why we feel stronger about our bearish oil call – that one is easy to predict and can be very profitable to trade.