“Ignore the drop in oil prices… it’s just technical” is the message from Goldman’s bullish Damien Courvalin who believes fundamentally the pace of the inventory declines are encouraging and does not see evidence in the oil market to justify this (negative) shift in sentiment. In other words, BTF Oil Dip!
Another technical oil sell-off
Oil prices fell sharply yesterday, down 3.6% with Brent prices now at $53/bbl. We view technicals rather than fundamentals as the driver of this move lower with the US weekly inventory data released yesterday in line with expectations and the sell-off accelerating as prices traded through their 50 and 100 day moving average.
US commercial inventories declined by 1.7 million barrels last week, in line with the API release the day before but short of the Reuters and Bloomberg surveys. On the crude side, the disappointment came from resilient imports and a large swing in the balancing item. And while implied demand appeared to dip week on week, we find that gasoline demand is likely once again understated, with the more accurate ethanol implied demand metric pointing instead to resilient gasoline demand growth, while distillate demand remains strong.
We find in fact that the US inventory data since March has been surprisingly good: crude inventories have been tighter than seasonal through March and April, with main petroleum products drawing faster than seasonal since February. This is consistent with the greater than seasonal inventory declines observed on aggregate in ARA European ports, Singapore and Japan.
Ultimately, the sell-off occurred an hour after the release of this US data and accelerated as prices traded through their 50 and 100 day moving averages, a repeat of the March 7 and October 29 sharp decline in prices. Yesterday’s decline also featured a increase in open interest, suggesting that like in these previous instances, new shorts were the drivers of the move lower.
Finally, although timespreads weakened slightly yesterday, the move was mainly a parallel shift of the forward curves, which is also reminiscent of the March sell-off and may reflect hedging pressures as well instead of a reassessment of forward fundamentals.
As a result, and despite yesterday’s move, we continue to view the pace of the inventory declines as encouraging for the rebalancing of the oil market. We further continue to expect an acceleration in stock draws through 2Q17 on the combination of high compliance to the OPEC cuts and robust demand growth, as observed so far this year.
Finally, while concerns over a slowdown in global growth and an unwind of the reflation trade may have contributed to the roll over in oil prices over the past week, we currently do not see evidence in the oil market to justify this shift in sentiment. This leaves us reiterating our sequentially constructive 2Q17 Brent price forecast of $59/bbl.