Oil rally seen continuing if destocking pattern emerges

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Yesterday’s rally in oil prices (NYMEX:CLF14) was mostly U.S. centered as TransCanada announced that the 700,000 bpd Keystone South pipeline will begin operation on Jan. 3. As discussed in yesterday’s newsletter, this is a negative for the Brent/WTI spread as the takeaway capacity out of Cushing will increase strongly in the short term.  Further supporting the rally into the overnight trading hours was a surprisingly large draw of 12.4 million barrels of crude oil stocks reported by the API late yesterday afternoon.

With total U.S. crude oil and refined product inventories already lower by more than 33 million barrels since the middle of October, if crude oil enters into a strong destocking pattern as evidenced by the API report the current oil price rally is likely to extend further.

The Brent/WTI spread has now dropped below the $16/bbl support level and is back into the $12/bbl to $16/bbl trading range. The spread has declined steadily since peaking at $19.21/bbl on Nov. 28. The spread has now narrowed by $4.35/bbl or 22% in the last four trading sessions. The imminent start-up of Keystone south is sending the long side spread traders to the sidelines as the trade going forward appears to be back into a narrowing pattern for the short term.

OPEC is meeting in Vienna today to decide if they want to start the process of defending the price of crude oil. The price activity in the oil complex along with the huge draw in crude oil stocks reported by the API may be enough to sway those sitting on the fence to postpone a production cut until next year or at least until it is clear as to when shut-in Iranian oil will begin to hit the market as well as how Iraqi production materializes over the coming months. There is still a small chance of a cut at this meeting but the overwhelming market consensus is for a rollover agreement.

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