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is oil ready for another crash?

March 19, 2017

Week of March 10

Yuxin Liang

On March 8th, WTI crude oil price hit 3-month low and dropped 5.4% from $53.14 to $50.28 due to increase in crude oil inventories reported by American Petroleum Institution (API) and Energy Information Administration (EIA). The energy sector plummeted 2.5% on March 8th, it was the biggest drop in six months. The oil price crashed in March is not evitable.

The API reported 11.6 million barrels of the week of March 3rd crude oil inventories on March 7th afternoon. It largely exceed market estimation and previous weekly data 1.66 million barrels and 2.502 million barrels respectively. API cumulatively recorded 35 million barrels increased since the first week of 2017. The EIA crude inventories increased for eight weeks consecutively. It released that it surged 8.2 million barrels exceed expectation by 2 million barrels. In terms of the production side, US production level recorded at 9,088,000 barrels per day that are the highest level since March 2016.

There is another clue for the crash of oil price. The U.S. Commodity Futures Trading Commission (CFTC) recorded the highest level of the net long position at 413,637 contracts on the week February 21st. After following a week of February 28th, CFTC reported net long position of crude oil futures and options were decreased by 26,930 contracts to 386,707 contracts, which represent 6.5% reduction from the previous week. The bullish signal for hedge fund ended; speculators had started to cover their long positions on March 3rd. Moreover, when the contracts are expired, there are more physical crudes will be delivered. Therefore, the crude inventories are expected to continue to surge in upcoming months.

Even though OPEC had reached an agreement for output cut deal, the rise in oil production and inventories can offset the effort of OPEC and continue to limit upside potential of oil price. The positive factor, for now, is to wait for the next extension cut plan, but there are many negative factors pressuring current crude oil price below $50. The market has been traded out of the fundamental basis for the past months even the supply of crude oil has consecutively increased for weeks. The bearish signal has been switched on.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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