Crude Oil Today - API data shows a big draw, but Brent has outperformed

Market Analysis /
Greg McKenna / 08 Aug 2018

Welcome to Crude Oil Today, my brief look at what's happening in oil markets and what it might mean for prices. 

As ever, feedback welcome

QUICK SUMMARY

API data is out this morning and showed a bigger than expected draw of 6 million bbls against the 3.3 million expected. Before that though, Oil was already higher too as traders again seemed to focus on the Iranian sanctions. WTI is up just 0.2% at $69.16 while Brent is 1.2% higher at $74.65.

BIGGER PICTURE

I feel like I'm a day out on oil at the moment as reports are traders are reacting to news that has already been announced. 

Headlines suggest the rise in Brent is about the Iranian sanctions and Saudi supply again. That could be true, I have no reason to doubt it. But I would note that the divergence between WTI, with it’s gain of 0.2% for the front contract, and Brent, which rose 1.2% can also be explained by the 4 hour trendline holding for Brent but breaking for WTI.

I know in a world of swirling geopolitics that a simple chart based technical explanation may not satisfy some. But the reality is most commentary today is still fitting the narrative to the price action and for me this is just a market. One where traders still trade and part of that trade is looking at charts.

Indeed if it was supply that was really an issue WTI should be higher given US production estimates for 2018 were revised down overnight.

Reuters reported this morning that, “output was expected to rise 1.31 million barrels per day (bpd) to 10.68 million bpd in 2018, lower than last month’s forecast of growth of 1.44 million bpd to 10.79 million, according to the U.S. Energy Information Administration”.  

Interestingly Reuters also quoted Linda Capuano, EIA Administrator as saying, “we continue to expect Brent crude oil spot prices to fall towards $70 per barrel by the end of 2018, as the market appears to be fairly balanced in the coming months”. Brent is currently at $74.43. Here’s the chart.

Click on me, I'll expand
Click on me, I'll expand

On Iran and the US sanctions, the entreaty of the American's that anyone who will do business with them won't be able to do business in the US is something to watch. Europe has their blocking statute, Russia said it is "deeply disappointed" buy Washington's approach, and the UK junior foreign minister (who knew there was such a job) said last night, "f a company fears legal action taken against it and enforcement action taken against it by an entity in response to American sanctions then that company can be protected as far as EU legislation is concerned". 

But he added and this is critical, "it is a commercial decision for companies whether they continue to work in Iran". Indeed it is. ANd perhaps many companies will be like the Iraqi goverment who said overnight it doesn't agree with the sanctions but will abide to protect itself. 

Perhaps this last bit is where I'm going wrong in my thinking? 

DATA:

On the day we get the BoJ summary of opinions, bank lending and trade data from Japan. Home loans and Westpac Consumer confidence are out here in Australia while RBA governor Phil Lowe will be speaking at the Annika Foundation lunch at 1.05pm AEST today – more colour on that inflation and unemployment change in his statement yesterday I’d bet.

Chinese trade, exports, and imports for July are also out around the same time Lowe will be speaking. Tonight it’s fairly quite in the US with mortgage applications and then EIA inventory data out for oil and energy markets.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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