Oil complex shows strong round of selling

The oil complex moved from drifting lower on Tuesday to a strong round of selling as the weak shorts headed to the sidelines as the month came to a close. The oil complex is failing from a technical and fundamental perspective. With the huge overhang of crude oil in the US Gulf Coast expected to continue to build over the next several weeks and with the geopolitical risk areas of the world seemingly stabilizing a tad the market sentiment is shifting away from a bullish view.

The demand side of the equation looks like it could weaken going forward as the energy sensitive Chinese PMI and US manufacturing data both came in below expectations and below the previous month’s index thus suggesting a slowing in manufacturing and possibly the entire economy of the two largest economies in the world. Later this week the important monthly US nonfarm payroll data will hit the media airwaves early Friday morning. At the moment the market is expecting 195K new jobs with the headline unemployment rate remaining steady. 

On the supply side of the equation last night’s API report (see below for more details) showed a large crude oil (NYMEX:CLK14) draw from inventory as imports declined strongly by 769,000 bpd due to last week’s three day closure of the Houston Ship Channel. Although this seems somewhat bullish it is only a temporary event. By next week’s report the imports will have recovered and inventories will once again be building strongly. Aside from the temporary draw shown in the API report (still have to see if the EIA report is in sync) crude oil stocks in the US Gulf region are at record high levels and the spring refinery maintenance season is not yet anywhere near its peak. Going forward as refiners throttle back utilization rates for maintenance crude oil demand will continue to decline and inventories will likely set new record highs before peaking in a month or so.

With the Ukraine situation still evolving but seemingly easing and with no new geopolitical issues emerging from the volatile MENA region supply is more than adequate going forward and is likely to remain a pressure point on prices in the short to medium term.

With the destocking of crude oil inventories in the Cushing area continuing at an accelerated rate (API showed a draw of 1.3 million barrels last night) the May Brent/WTI spread was hit with another round of selling sending the level below the range technical support level of $6/bbl. The market settled below this level and may now be settling into a broader $2.30/bbl to $6/bbl trading range. Along the way there is light support at the $5.30/bbl level and then at the $5/bbl level that must be breached to safely say the market is settling into the aforementioned trading range.

I have been of the view for months and have been discussing it in the newsletter that the spread will return to its normal historical relationship that existed prior to the crude oil build-up in the Cushing region. The spread remains on a narrowing path and I continue to expect the spread to narrow with a few short term interruptions from time to time as it moves slowly toward WTI trading at a modest premium over Brent.

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