Oil stabilizing on blocked Suez canal and OPEC+ anticipation

Just as the oil market was staring at a potential deeper loss it received a Suez blockage bounce overnight. This after a 400-meter container ship named “Ever Given” ran aground in the canal to block traffic in both directions, thereby disrupting a major passageway for the global commodities trade. The Suez Canal is one of the world’s busiest waterways and a delay running into days, not hours, will cause a major congestion and delay in the two-way flow of both oil and fuel products.

However, while the blockage is a problem for refined products, crude oil can bypass the canal via two large nearby regional pipelines: Sumed (South-to-north) and Ashkelon-Eilat, which is bi-directional. In total these two pipelines has, according to Bloomberg, a capacity larger than the normal crude flows across the canal. 

Returning to the recent weakness and when it may stop, we need to turn our attention to investment flows. Since the early November vaccine announcements, which kicked off a strong rally driven by momentum, tightening fundamentals and reflation focus, money managers such as hedge funds and CTA’s, bought 370,000 lots (370 million barrels) of WTI and Brent thereby almost doubling their net-long position.

However, during the past five weeks up until March 16, when crude oil continued to rally, they stopped buying. Rising risk adversity driven by the spike in US bond yields and with that a stronger dollar and growing signs that oil was being held up by OPEC+ and not from rising demand was the canary in the mine that only needed a spark to turn ugly. That spark was delivered last week by a cautious outlook from the IEA and the FOMC triggering renewed bond market volatility.

The next COT update covering speculators crude oil positions will include the 7% sell off last Thursday and yesterday’s 6% correction. The level of long liquidation will give us an idea about the risk of further weakness, should OPEC+ fail to deliver a supporting message next week. The report will as per usual be released on Friday after the close and I will tweet the findings on Sunday.

Due to unpredictable behavior of the virus and a slow vaccine rollout, the expected strong recovery in global fuel demand looks likely to suffer further delays. With this in mind, the expected 2021 pickup in global crude oil demand by around 5.5 million barrels/day continue to rely increasingly on a strong pickup during the second half. With this in mind next week’s OPEC+ meeting should give us a good reading on how the group sees demand developing into the summer months.

Considering the risk of OPEC+ pulling another rabbit out of the hat to support the oil market, we see the long overdue and much needed correction being close to having exhausted itself. From a technical perspective we see the downside on Brent crude oil limited to $58/b while renewed upside focus will not kick in before it climbs back above $65/b.

Later today at 14:30 GMT, the US Energy Information Administration will publish its “Weekly Petroleum Status Report” and surveys as well as last nights industry report from the American Petroleum Institute (inserted below) point to a fifth consecutive weekly rise in crude oil stocks. Apart from that the market will as per usual also take a closer look at the post-Texas freeze recovery in refinery demand, as well as the level of activity on the roads as seen through the implied demand for gasoline and diesel. As per usual I will publish results and charts on my Twitter handle @ole_s_hansen.