Wednesday June 8, 2016
Front month WTI settled above $50 for the first time in nearly eleven months on Tuesday, spurred by continued weakness in the U.S. dollar and by the start of some technical short covering. Without any new news of late (supply outages appear to be the norm, and the Federal Reserve seems content to stay away from interest rate hikes), the oil market seems to be left to its own (de) vices, and the momentum now is certainly on the side of the bulls. Aside from last Friday’s minor dip, oil prices have been flat to up virtually every day for the last few weeks.
After a fairly strong defense of $50, the technical bears may soon look to get out of the short game in fear of another multi-dollar price increase. Wednesday morning will see the release of the weekly Department of Energy (DOE) inventory report, which is expected to show a healthy draw in crude oil stocks.
July WTI was already above $50 by the time most of North America was moving on Tuesday, and it stayed that way for the entirety of the day. Though the front month contract did trade above $50 on two different occasions in the last few weeks, it had never recently settled above that figure until yesterday. Though there haven’t been any massive up days, there have been many, many smaller up days – gradual momentum. The Heating Oil contract has also provided some additional support, as it has been even strong than WTI of late (though RBOB has lagged). A bullish DOE report could auger a much larger price increase on Wednesday. July WTI settled at $50.36 (ironically, this is the same price as the last time front month WTI settled above $50).
Difficult to describe the relationship now between the NYMEX RBOB and Heating Oil contracts, as their outright performance of late has belied fundamentals. Including Tuesday’s changes (RBOB was flat, Heating Oil was up four cents), the RBOB / HO spread has narrowed by seven cents so far this calendar month and is now a mere four-and-a-half cents (for comparison, a year ago, the RBOB / HO spread was over fifteen cents). Even more peculiar in this recent product price action is that distillate stocks in PADD I (East Coast, home of the NYMEX delivery point) are significantly higher than historical norms, especially when compared to PADD I gasoline stocks. It is possible that there has been some reversal of some investment money in the RBOB / HO spread (that is, those who were long that spread have had to cover it and sell the RBOB).
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