TARGET PRICE: $85.50/bbl – $86.50/bbl
PRICE: $87.20/bbl
Crude Oil on the Grind
The crude oil futures market rallied to 4-month highs this week and is on track for its fourth consecutive weekly increase. The market was quieter this week due to the Independence Day holiday in the US.
We held a bullish view and forecasted that September Brent futures would end the week between $85.50/bbl and $86.50/bbl. Price action surpassed our expectations and is supported above $87/bbl as of Friday morning. The key factors that supported crude oil this week are:
- Bullish EIA Stats
- Atlantic Hurricane Season
- Bullish Market Positioning for Summer
The deep weekly draw in US crude inventories buoyed crude oil prices. The EIA reported a 12.2 mb draw for the week ending 28 June. This surpassed analyst expectations of a 1.0mb draw, according to Bloomberg. This was accompanied by a 2.2mb and 1.5mb draw in US gasoline and distillate inventories, which were higher than anticipated. US refinery runs also rebounded from 92.2% to 93.5% w-o-w. Alongside higher implied demand figures for gasoline and distillates, the stats provide a bullish signal for US summer travel demand, which could further tighten the oil market. Investors likely took heart from the more complete data published in the EIA’s monthly PSM report, which showed stronger April demand in the key products, notably gasoline, than was suggested in the higher frequency weekly data. With gasoline demand on a more solid footing, expectations around the seasonal summer upswing in demand were rekindled, allowing the RBOB crack to inch up higher.
Furthermore, concerns about Hurricane Beryl disrupting production and refinery operations on the Gulf Coast supported bullish sentiment. Markets were on edge at the beginning of the week following Hurricane Beryl’s rapid intensification, which made it a Category 4 hurricane within 24 hours.
As a precautionary measure, Shell, BP, and Exxon Mobil had evacuated some of their platforms in the Gulf of Mexico. Although the risk to production in the Gulf of Mexico has eased, Beryl is the earliest recorded category 5 hurricane. Moreover, the NOAA was warned of an “extraordinary” Atlantic hurricane season this year, so traders are positioning to the upside in anticipation of supply disruption risks.
Money managers are back in full swing and are quickly adding bullish bets in Brent. This comes from a combination of short covering flows and new long positions. The Onyx CFTC predictor forecasts money managers to increase their net positioning for Brent futures by 9.3mb (+6%) in the week to 2 July. In addition, Onyx’s CTA model shows that net positioning in Brent futures has increased from 14k lots (63rd percentile since 2014) to 23k lots (72nd percentile) this week. CTA buying flows have likely exacerbated the crude rally, reflecting a market that is increasingly confident about summer demand.
