Short Covering Or Fresh Long In Oil?

Consolidation has begun at these depressed prices in equities that companies are expanding and the big news this morning has been Suncor’s aquisition of Petro-canada. From a non-equity view point, this is a signal that oil sands are not a viable replacement for the conventional crude at current price levels and with equitiy prices at such depressed state, cross aquisition makes sense. SFOT reckons this is just the beginning and there will be more consolidation to come in the near future, however, he shall leave it to the gurus in the equity world to indulge in this game.

Back to the oil barrel, the recovery of prices were mostly led by the middle distillate. Cracks have rallied across the curve and SFOT could not see any sudden increase in demand for that part of the barrel and have to put the current movement to short covering and end users in the longer end.

The latest CFTC data has confirmed that there has been short covering in WTI over the past week by large traders. Looking at middle distillate specifc, diesel stocks are extremely high globally, jet demand is extremely poor other than demand for storage use in contango play. Asia in particular has been hit hard. It is also the time we exit summer in the northern hemisphere which means demand for heat stocks are at its seasonal lows.

Having said that, Brent is almost at the high of the year on a continuous basis, and Gasoil have just broken the 50% fibonacci retracement and catching up fast. Fundamentally SFOT is sceptical about the rally, however, the amount of flows from leveraged community and possible end users cannot be ignored in the energy market.

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