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Crude oil prices have recovered by nearly 10% at the time of writing from the year-to-date lows seen late last week. An encouraging set of weekly US data from the EIA, as well as evidence of continued strong compliance from OPEC have boosted prices.
US crude stocks fell by 5.2 mb w/w, the largest decline since the year-end dip in stocks. This inventory decline may prove to be the inflexion point we have looked for in the data, but crude stocks remain extremely elevated and are only 2.5% below the all-time high reached at end March.
Moreover, total commercial stocks are within 1% of their all-time high if one excludes the highly seasonal propane inventory drawdown. Less supportive of prices is US crude production reaching 9.3 mbd in the latest weekly assessment, a cumulative increase of 544kbd since the end of 2016.
CFTC data released within the last week demonstrate that managed money long and short positions for both Brent and WTI have returned to levels last seen in November. It suggests that the bullish shift in investor sentiment post the November OPEC meeting has now unwound completely.
We assume that OPEC rolls over the November agreement in late May for a further six months at the current level of production restraint. We assess the likelihood of a renewed agreement as 75%. However, progress towards the stated objective of reducing inventory levels to the five-year average level has been poor thus far. Consequently, we consider what alternative agreements to the six-month rollover would better help OPEC achieve its goal.
We close the WTI spread position and open a long Brent spread position. We retain our other trades – the Brent call spread, long August Brent position and the short front-to-back Brent straddles.
