ECBís Hawkish Move Sent Crude Oil Skyrocketing but Will Rally Last?

Witawat (Ed) Wijaranakula, Ph.D.
Thu Dec 3, 2015

The spot WTI crude oil price bounced 4.19% to an intraday high of $41.78 per barrel on Thursday, after the European Central Bank (ECB) announced at its Governing Council meeting in Frankfurt that they would cut the overnight deposit rate to minus 0.3% from minus 0.2%, and leave its key lending rate unchanged at 0.05%. The ECB also said it decided to extend purchases of government bonds and other assets from the September 2016 target date through at least March 2017. Some analysts had expected the ECB to drop the overnight rate to minus 0.4% and the key lending rate to zero from 0.05%, as well as to expand its 1.1 trillion euro bond-buying program by 360 billion euros.

The ECBís hawkish move also sent the U.S. dollar, which is inversely correlated with the WTI crude oil price, tumbling against the euro, as the EUR/USD currency pair was quoted at 1.0938 dollars per euro on Thursday, up 3.08% for the day.

The crude oil got some support from an Energy Intelligence report on Thursday saying that Saudi Arabia may propose an eventual production cut of 1 million barrels a day, at the Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna on Friday, which may take effect in 2016. Saudi Arabia would consider the cut only if a number of conditions are met, and output reduction would not be agreed to at the Friday meeting. Iran already rejected a Saudi call to join an OPEC production cut, saying it would move forward with plans to boost its output by 1 million barrels a day after western sanctions over its nuclear program are lifted next year, according to The Wall Street Journal.

The spot WTI crude oil price has been on a wild ride, as it tanked 3.72% on Wednesday, after the U.S. Energy Information Administration (EIA) said that U.S. commercial crude oil inventories rose to 489.4 million barrels, up 1.2 million barrels in the week ending November 27. Analysts had expected an inventory draw of 668K barrels. The EIA said stockpiles at Cushing, Oklahoma, the delivery point for WTI futures and the biggest U.S. oil-storage hub for WTI futures, rose by 428K barrels to 59.026 million barrels, approaching the April 17 peak level of 62.2 million barrels. Total storage capacity for the site was 71.4 million barrels as of March 31, according to the EIA.

Excluding the Strategic Petroleum Reserve (SPR) of about 695.1 million barrels, U.S. crude oil inventories remain near the peak level of 490.9 million barrels set in the week ending April 24, 2015. On Tuesday, the American Petroleum Institute (API), an industry group that represents about 400 oil and natural gas corporations, said its crude oil inventory data for the week ended November 27 showed a build of 1.6 million barrels, while stocks of crude at Cushing were up 453K barrels.

According to Societe Generale SA analysts in a Bloomberg report at the end of November, the crude oil market is in contango and it isnít going away anytime soon due to the shortage of storage capacities and a rise in storage costs. 

Contango refers to a situation where the front-month or near-term futures contracts are trading less than or at a discount to longer-dated futures contracts, as traders are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity. The higher the spread move, the wider the contango. In tightly-supplied markets, when crude oil prices are strong, that spread value is the complete opposite.

The state-controlled oil producer Petrůleo Brasileiro SA, said last week that a three-week-long strike by Brazilian oil workers appears to be winding down after the majority of the unions agreed to resume work. According to The Wall Street Journal, the production is now ďnormalizingĒ and the company expects to maintain its 2.125 million barrels a day of oil production for 2015, Petrobras said in a statement.

As of November 24, there are 250,061 long positions of light sweet crude oil futures, traded on the New York Mercantile Exchange (NYSE) by managed money or hedge funds, a decrease of 16,126 long positions from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. 

This is compared to about 164,953 short positions, an increase of 8,724 short positions from the previous week where light sweet crude oil contracts are traded in units of 1,000 barrels. Hedge funds continued to increase their net short positions by about 24,850 contracts, as they are betting that the crude oil price could go lower.

From our near-term technical viewpoint, the crude oil price has been moving in a bearish lower low chart pattern, meaning every low (L) is lower than the previous low. In order to establish an uptrend, the crude oil price needs to break out and stay above the November high of $48.36 per barrel level. There are walls of resistances between the current price and that November high, though.

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