Benzinga - by Kevin Green, Benzinga Contributor.
To no surprise, OPEC+ extended its voluntary cut of 2.2 million barrels per day through the end of Q2 to shore up prices after weak global demand and uncertainty around China's reopening efforts. The biggest surprise within the announcement is the fact that Russia will cut its output and/or exports by an additional 471,000 barrels per day, adding to its already 500,000 bpd oil and fuel export quota during Q1 of this year. The additional cuts will take place in a tiered strategy over the next several months. However, to the oil market, this is more than just routine refinery maintenance. With the recent announcement of banning gasoline exports for the next 6 months and the odd back-and-forth between Russia and India over a supposed payment dispute, one begins to wonder about the magnitude of the impacts drone strikes and the war against Ukraine are having on operations. Nevertheless, Russian spot oil prices are still relatively cheap, and questionable tanker transfers right outside of Greece continue to occur daily. Aside from the minor surprise by Russian voluntary cuts, the market already priced in the OPEC+ events from the weekend as U.S. crude remains around the key $80 price level.
This Week’s Focus This week, the focus will be on the key EIA Weekly Petroleum Status Report. Over the last several weeks, an interesting dynamic has emerged. Weekly supply estimates continue to show that the U.S. is producing 13.3 MMbpd, which continues to be a record, but we are also witnessing relatively low operable utilization rates that are near December 2022 lows. This is the reason we have seen inventory levels for crude build at a rapid clip and even exceed expectations in some respects. This in nature is bearish for crude prices in theory, but this "build-up" is also forcing the drawdown of oil byproducts like gasoline, diesel, among other products. The market is under the assumption that once the refinery maintenance season is concluded, the buildup in oil inventories will drawdown and the demand for byproducts will stabilize, but this may not be the case. Several major refining companies have stated in their recent earnings announcements that refining operations may be fairly low in the first quarter of this year, not only due to seasonal maintenance but also for margin improvement. As prices for byproducts stabilize, the spread between refining oil and selling the byproducts in the secondary market will improve, leading them to a long-term profitability strategy instead of a demand destruction strategy by flooding the market.
Another key item to watch moving forward will be the number of crude exports completed on a weekly basis. Export demand will be vital for price stability in the near term as domestic inventory levels continue to build. If the market continues to see positive growth for exports, especially if the U.S. achieves over 5 MMbpd in exports, then higher prices should follow. This would be a "tall" order but would signal that global demand may have bottomed and may also imply that China is beginning to backfill its inventory, a key development almost every commodity is looking forward to in the near term.
Crude oil net long speculative positioning has increased by 38% since the lows in early February, which is a bullish sign that the price level of around $72 proved to be a value area for investors. Now, the market is still at relatively low levels on a 10-year basis, but a base has formed similar to the positioning seen in June 2023 when oil spiked from $67 to $95. By no means will we see a similar type of price movement in regard to nominal dollars, but the structural setup from a positioning standpoint is bullish in the near term.
Macroeconomic and geopolitical risk still remain and could create downward pressure on prices if major economies like China or the Eurozone continue to publish weak data. From a geopolitical perspective the crisis in the middle east has only warranted $1.50-$2.00 in premium for crude so any positive developments in the near-term should be shrugged off. Any escalation of tensions may also be ignored by the market for now (as far as price), but should not be forgotten.
Technical Landscape
From a technical standpoint, crude has been in a solid ascending channel since the middle of December, respecting both upper and lower channel lines. A value area exists between two overlapping channels that formed early to middle of last year between $72.25 and $74.25. A pullback after hitting the $80 intraday over the last two sessions would be appropriate. There is a significant area of resistance at $81.70 and then $85.00. The Relative Strength Indicator is still in a bullish uptrend, and until a divergence emerges — meaning price continues to advance but RSI moves lower, which is a sign of momentum losing steam — the bullish case for crude should not be ignored. The MACD is still in a bullish uptrend as well; watch for the 12 EMA crossing below the 26 average. If that occurs and lasts for more than 4 sessions, a short-term pullback may be in place. Based on the ratio chart of crude oil vs. Energy Select Sector SPDR Fund (ARCX:XLE), crude is still relatively cheap compared to energy stocks within that index.
Integrated players with exposure to downstream operations, refiners (short-term pain), petro distributors/transporters, and retail outlets will benefit in the near term as refining rates are starting to repair themselves, but exploration efforts could also weigh on operations since refining utilization rates are still near two-year lows.
This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.
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