COLUMN-Oil rally loses momentum: Kemp - Reuters News
(John Kemp is a Reuters market analyst. The views expressed are his own)
* Chart 1: http://tmsnrt.rs/1OelLby
* Chart 2: http://tmsnrt.rs/1OelTI2
* Chart 3: http://tmsnrt.rs/1OelTHW
* Chart 4: http://tmsnrt.rs/1QXf3RO
* Chart 5: http://tmsnrt.rs/1QXf201
By John Kemp
LONDON, May 10 (Reuters) - The rally that carried oil prices
up by more than $20 per barrel between the middle of January and
the end of April seems to have run out of steam for the time
Spot crude prices, time spreads and refining margins have
all showed signs of weakening since the start of this month.
Crude prices are struggling to rise further despite signs of
continued growth in consumption.
Prices for both WTI <CLN6> and Brent <LCON6> futures with
delivery dates in July peaked at the end of April and have been
Prices for both futures contracts yesterday closed below
their 14-day and 20-day moving averages for the first time since
early April illustrating how the rally has run out of momentum
Timespreads, which tend to track the supply-demand balance,
have eased since the end of April after tightening progressively
since the start of the year (http://tmsnrt.rs/1OelTI2).
Short-term interruptions to crude output, ranging from the
wildfires in Alberta to problems with Libya's exports, have
failed to provide a sustained boost to either spot prices or
Refining margins have also started to soften which could be
a bad sign for oil demand if they encourage refiners to cut
crude processing (http://tmsnrt.rs/1OelTHW).
In the United States, the generic 3-2-1 crack spread
<CL321-1=R>, which measures the gross revenue from turning three
barrels of crude into two barrels of gasoline and one barrel of
diesel, has fallen from $19 to around $15.50.
Valero, the largest independent refiner in the United
States, reports indicative margins for its refineries along the
Gulf Coast have dropped from $20 to less than $17.
After firming progressively since February, indicative
margins for refineries in the mid-continent area slipped last
week from almost $13 to less than $11 (“Key commodity prices and
differentials”, Valero, May 2).
In the last couple of weeks, U.S. refinery throughput has
slipped below the record rates reported at the same time a year
Hedge funds seem to sense the rally may be running out of
momentum, and have closed some bullish long positions, taking
Hedge funds and other money managers reduced their record
net long position in WTI and Brent futures and options from 663
million barrels on April 26 to 620 million barrels on May 3.
Long positions were cut by almost 38 million barrels while
short positions were increased by more than 5 million barrels
Profit taking was especially pronounced in Brent, where
hedge funds and other money managers cut their long positions by
28 million barrels, or around 6 percent.
Across the three major WTI and Brent contracts, hedge funds
cut their net long position by 43 million barrels, the largest
one-week decline since November 2015.
The concentration of hedge fund positions on the long side
of the market has increased the risk of a price reversal as a
result of long liquidation (“Risks rise as hedge funds place
record bet on oil”, Reuters, May 3)
The oil market is heading into the strongest period of
demand in the year as the U.S. driving season begins at the end
of the month which should provide some support to prices.
But at the moment attention has shifted away from the
decline in crude production and growth in demand to the overhang
of refined products such as gasoline and diesel, causing the
rally to stall.
Senior Market Analyst