Risk no longer favors the short; physical crude demand is rising seasonally
May 8, 2024
Key Observations:
The prompt WTI crude oil futures price (CLM4) slumped by another $1.50 per bbl overnight, taking CL1 more than $10 below its recent high ($87.67, Apr 12). But in passing through $77.40 this morning, CLM4 has now reached levels that we believe will motivate shorts to want to cover ahead of that contract's May 21 expiry.
Bruised sentiment was due a reversal, and it arrived mid-morning in the form of a surprise 1.36 million barrel U.S. crude stock draw reported by the DOE. The Bloomberg consensus survey had reportedly expected a build of comparable magnitude. The DOE data also show that refinery activity has exited its seasonal soft patch and entered its busy season, with U.S. crude demand increasing 307 thousand b/d WoW on a full percentage point boost in utilization (now 88.5%).
Private geospatial intelligence firms had accurately measured a 1.8 million barrel crude stock build in Cushing. This build foots with the observed halving in the M1-M2 timespread from $0.72 to $0.35 per bbl in the reference week ending May 3. Though crude stocks may continue to build seasonally in Cusing in coming weeks, the more important factor for oil price formation now is the return of seasonal demand, both products and crude.
World demand for U.S. supply is also solid. Crude exports hit trend at 4.5 million b/d, while product exports at 6.8 million b/d were 7% above trend.
Bottom line: the evidence of strengthening demand spurred CLM4 back above $79 for the strongest intraday advance since Apr 23.
Source: Bloomberg, NYM, EIA, Blacklight Research.
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