Summary:

• DOE inventories: -3.6M vs -0.4M exp and +5.8M prior
• Despite the drawdown, Oil price drop sharply following the release
• Oil-Oil.WTI spread moves above $11 – highest since 2015

The latest weekly inventory data from the US has shown a large drawdown in the headline DOE figure but despite this the price of Oil has dropped sharply since the release. Looking more closely at the data itself the the drop of -3.6M seems on the face of it to be fairly supportive of price, marking a sharp decrease on the +5.8M seen last time and also below both the consensus forecast (-0.4M) and last night’s API (+1.0M). 

 Oil initially popped higher on the release but has since dropped sharply lower and fallen to its lowest level of the day. Source: xStation

Other components of the report are less favourable for oil bulls however with production rising by another 0.4% w/w to 10.77M barrels per day. Distillates came in at +0.6M vs -1.2M exp and gasoline was also higher than expected (+0.5M vs -1.5M exp). However, the report on balance could be described as mixed and is not really in keeping with the drop of over $1 seen in price since the high seen shortly after the data dropped. 

Earlier there was some news out from OPEC with a Reuters survey showing that output for the month had fallen to its lowest level since April 2017. The decline of 70k barrels per day brings the groups total to 32m bpd with the declines led by Nigeria and Venezuela. This represents 163% level of compliance with the agreed upon cuts and is also positive for the market on the face of it. 

 Oil has rallied strongly from the low 60s to above the 80 mark but there have been some possible reversal signs of late. Source: xStation 

Given the fairly positive fundamental developments in terms of both the DOE release and the OPEC compliance it does seem quite puzzling on the face of it why price has turned so sharply lower. It could simply be a case of the market topping out on good news after  strong run higher for many months. It’s a fairly well known saying that markets don’t top on bad news, but good with the logic being that when a market fails to rise further despite positive developments, then it reveals an underlying weakness. Tonight’s close could be key as if the market ends the day lower then another possible reversal signal will have printed.     

 The Oil and Oil.WTI spread has widen to its highest level since 2015 with a gap of over $11 at present. Source: xStation

Another interesting development in the oil space is the growing divergence between Brent (Oil on xStation) and WTI (Oil.WTI on xStation). The spread between the two has increased markedly of late and this can be seen by the fact that Oil is higher on the day by 0.63% whilst Oil.WTI is down by 1.64% at the time of writing. This spread is currently at around $11 after earlier moving above the $10 mark for the first time since 2015. One of the main reasons for this move is the increase in crude oil stocks at Cushing, Oklahoma, which is the delivery hub for the WTI contract, as a result of the rising US shale production.