Expert Analysis: Oil Prices Have Risen Too Far Too Fast
Last Friday we argued that the rally in WTI and Brent looked overstretched from technical and positioning viewpoints. This week obviously didn’t serve our viewpoint as geopolitical tensions in Iraq alongside bullish long-term calls from Citi and the trading group community- particularly Trafigura- at APPEC pushed the market slightly higher. There are undeniably glut-clearing trends at work in the U.S. and abroad but we continue to feel that crude oil has risen too far, too fast and positioned for length-liquidation on any fundamental speed bumps as WTI’s 14-day RSI touched 70 this week while RBOB + Heating Oil net length held by hedge funds reached 2.5 standard deviations above its 2yr average.
– Despite our view that the market is technically overbought we still need to acknowledge tightening fundamentals in several key global trading hubs. PADD IB gasoline stocks are now -13 percent y/y at their lowest level since 2014, PADD IB distillate inventories are -32 percent y/y, Singapore middle distillate stocks are -7 percent y/y and ARA gasoil stocks are -20 percent y/y.
– Now for the not-so-good news. We’re already seeing the next stages of shale progress in North American markets opposite increased production in Libya. U.S. crude production printed 9.55m bpd last week which is 60k bpd shy of its 2015-high following a 750k bpd rebound from Harvey disruptions. Producer hedging in Cal ’18 and ’19 WTI was significant this week and is currently driving a 7-vol premium for WTI M18 25 delta puts relative to the 25 delta call. We expect U.S. and Canadian production to be a thorn in the side of bulls in coming months. Further east, Libyan production also topped 950k bpd this week (according to Bloomberg) which could also pour some cold water on the current Brent spread strength.
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