Is This The Beginning Of The Oil Squeeze?

Yesterday’s (Wednesday) DOE stats are as bearish as it can get. Demand lower, Gasoline stocks build massively against expectations. That crude prices are still rallying hard this morning can only be attributed to related rallies in equities, EUR/USD and specs. Can we now rally very hard towards $55 in WTI? Yes, only if Eur/Usd and Equities sustain this rally as WTI looks cheap compared to all other asset classes.

Now that technicals point to a breakout above the 100-day moving average in the front month WTI, the technical funds, hedgies + retails investors must be salivating at this ‘golden opportunity’. SFOT will not go against the trend but he remains very sceptical given that underlying situation is getting worse.

Refining margins are getting hit hard now that crude oil is rallying. The higher crude goes without cracks rallying, the more refiners will cut run and the more crude will be left unsold in the market. This is already starting to look the case as SFOT hears European refineries have cut run by around 15% so far and is prepared for more. The front month spread in Brent is the widest for a while and only confirms that there are a lot of crude that can’t be sold.

Brent Refining margin

The way the curve has been behaving, it seems a lot of end user type flows are in the market or it could also be specs buying the back end. Whatever the case, it now seems that we might have come to a time where volatility in the prompter months are ‘cheap’ to own.

SFOT does not think this rally is sustainable as the Fed has done what ECB did to Oil back in last summer and it could come back and hurt them harder.

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