Oil range-bound with supplies at 25-year highs

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Edward de Bono

The last week or so has been a volatile period for the oil complex. After declining strongly during the second half of last week (after the U.S. Fed announcement) the market has rebounded modestly to start this week only to be treading water ahead of this morning’s EIA weekly inventory report. The technical uptrend that began in the beginning of June ended late last week with the spot WTI futures contract now settling into a lower trading range of $93/bbl on the support side and about $96.25/bbl on the upper resistance end.

The overall fundamental picture has not changed this week with oil stocks in the U.S. at the highest level in more than 25 years. Simply put, oil is well supplied with supply still outstripping demand. There are no indications of any imminent geopolitically driven supply disruptions with all signs pointing to supply growth continuing in non-OPEC countries… in particular the U.S. With the externals starting to turn, oil market participants are starting to focus more attention on the fundamentals and technicals.

Equities and the direction of the U.S. dollar have been the two most supportive price drivers for the oil complex as well as the broader commodity complex throughout most of this year. However, with the U.S. Fed signaling that it is nearing the beginning of the end of the massive quantitative easing programs, the direction of equities and the U.S. dollar have started to turn into a more bearish mode and thus are becoming a negative price driver for the oil complex.

The spot Brent/WTI spread blew through the $7/bbl range support level on news of pipeline issues in oil flow out of Canada earlier in the week. Enbridge reported on Monday that the southern portion of the 345,000 bpd Athabasca pipeline into Hardisty was shut down. That said the pipeline has now started to return toward a more normal level. The exact cause of the small leak is still unknown but there has been heavy rains in the region resulting in floods that could have moved the line and cause the damage.

The spread ended yesterday’s trading session slightly below the $6/bbl mark as the market momentum continues to point toward further narrowing. The spread is now solidly in a new lower trading range of $7/bbl on the upper end and about $5/bbl on the lower, support level. The last time the spread traded at the current level was back in the second half of January of 2011.

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