Hopeful Bulls Caught Holding the Long Bag

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The oil market slumped on Tuesday after the special oil producer summit failed to deliver on bullish hopes for output cuts. While post-meeting comments indicate there was at least extended discussion on a production freeze, the biggest parties at the table (namely, Saudi Arabia and Iran) have fundamental differences on forward production targets.

Iran is trying to rebuild its economy after several years of sanctions (and to fund its military efforts in Syria), and insists on continuing to increase production. Saudi Arabia (and several other OPEC members) would like to trim the global glut by minimizing production growth. These beliefs are really no different than what we have expected for months.

The intra-day sell-off mimicked the gains from Monday, and WTI remains in the range from the last two months. Wednesday morning will see a new Department of Energy (DOE) inventory summary, which will again be heavily impacted (on the products side) by the recent Colonial Pipeline shut down. Even though the pipe is up and running, seemingly without incident, there is still a dearth of gasoline in the Southeast (PADD I).

The oil meeting in Algeria began in the wee hours on Tuesday (East Coast time) and the market was trending lower overnight and into the morning. Early leaks of the 'no freeze' decision certainly contributed to this price decline, and some hopeful bulls were certainly caught holding the long bag. November WTI was down almost two dollars at its nadir, though it did rally a little in the afternoon to trim some of the day's losses. At the settle, the front month WTI contract was down $1.26 and closed at $44.67. WTI has settled between $43 - $48 virtually every day for the last six weeks.

The finished products continue to exhibit much more volatility than WTI, in large part, of course, due to the pipeline issue and its impact on supply throughout the eastern United States. On Tuesday, HO lost four cents while RBOB was down less than a penny. The only consistent market view yesterday was that the market structure for both products moved in the same direction (that is, up). The RBOB backwardation has been moving up in recent days while the HO contango has been narrowing (in each case, the front contract has been outperforming the back). The DOE data today will likely lead to more volatility in these products and spreads.

Published by PAPCO, Inc. (PAPCO)   

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