Oil Stabilizing on Blocked Suez Canal and OPEC+ Anticipation

What is our trading focus?

OILUKMAY21 – Brent Crude Oil (May)
OILUSMAY21 – WTI Crude Oil (May)

Crude oil’s two-week tumble extended further yesterday with Brent crude oil almost touching $60/b in response to fund selling following a renewed deterioration in the short-term outlook for demand. Having corrected 15% from the March 8 peak above $70/b, the market will increasingly be focusing on next week’s OPEC+ meeting and what the group can and will do in order to stem the slide.

The combination of fund’s exiting longs at the front of the curve, where liquidity is abundant, together with signs of another Covid-related delay to the expected surge in fuel demand, has seen the front month spreads on both WTI and Brent crude oil return to a contango. A structure normally signaling an oversupplied market with spot prices trading the cheapest along the curve. The longer dated spreads have also seen a sharp deterioration with the three-month spread slumping to $0.5/b from above $2/b less than a month ago.

Just as the oil market was staring at a potential deeper loss it received a Suez blockage bounce overnight. This after a 400-meter container ship named “Ever Given” ran aground in the canal to block traffic in both directions, thereby disrupting a major passageway for the global commodities trade. The Suez Canal is one of the world’s busiest waterways and a delay running into days, not hours, will cause a major congestion and delay in the two-way flow of both oil and fuel products.

However, while the blockage is a problem for refined products, crude oil can bypass the canal via two large nearby regional pipelines: Sumed (South-to-north) and Ashkelon-Eilat, which is bi-directional. In total these two pipelines has, according to Bloomberg, a capacity larger than the normal crude flows across the canal.

Returning to the recent weakness and when it may stop, we need to turn our attention to investment flows. Since the early November vaccine announcements, which kicked off a strong rally driven by momentum, tightening fundamentals and reflation focus, money managers such as hedge funds and CTA’s, bought 370,000 lots (370 million barrels) of WTI and Brent thereby almost doubling their net-long position.

However, during the past five weeks up until March 16, when crude oil continued to rally, they stopped buying. Rising risk adversity driven by the spike in US bond yields and with that a stronger dollar and growing signs that oil was being held up by OPEC+ and not from rising demand was the canary in the mine that only needed a spark to turn ugly. That spark was delivered last week by a cautious outlook from the IEA and the FOMC triggering renewed bond market volatility.

The next COT update covering speculators crude oil positions will include the 7% sell off last Thursday and yesterday’s 6% correction. The level of long liquidation will give us an idea about the risk of further weakness, should OPEC+ fail to deliver a supporting message next week. The report will as per usual be released on Friday after the close and I will tweet the findings on Sunday.