Crude oil stabilising back into tight range ahead of EIA report Three-week surge underpinned by geopolitical jitters and short covering Expectations are for a 1.4 million barrel draw on inventories By Ole Hansen Crude oil has stabilised following a three-week surge which saw the price rally by more than 10%. Having returned to the band of resistance which halted the advance back in January and February some profit taking has now emerged with the geopolitical risk premium reduced. Next up is the weekly dose of US inventory and production data. The March slump was primarily driven by a record bullish bet becoming increasingly stale and eventually unprofitable. This as the market sensed an emerging stalemate between Opec-Nopec cutting efforts on one side and rising US production on the other. During the rout that followed, longs were cut while new short positions were added. By the time the market stabilised the combined net-long in Brent and WTI crude oil had been cut by 177 million barrels to 642 million. While the gross-long only saw a modest 38-million barrel reduction, it was the 139-million barrel addition of new short positions which eventually helped trigger the recovery. The strong rally since then was sparked by short-covering from traders worried about being short as geopolitical tensions rose following the US missile attack on Syria and renewed focus on the troubled Korean Peninsular. The latest 'Commitments of Traders' data from the week ending April 11 shows crude oil was bought for a second week with most of the change being driven by continued short covering. During the past two weeks the combined net-long in WTI and Brent crude oil has risen by 10% to 740 million barrels. The 69,000 lot increase was 50,000 lots from short-covering while new buying only contributed 19,000 lots. Once again it highlights the importance of keeping an eye on short positioning as a major market mover. As someone said recently: 'Don't be short if you can not deliver the barrels'. Turning the attention to today's weekly US 'Petroleum Status Report' we saw the API Tuesday report that US crude supplies fell by 840,000 barrels while gasoline inventories showed a surprise gain of 1.37 million barrels. US gasoline stocks have been falling in line with seasonal expectations for the past seven weeks. A Bloomberg survey is looking for a 2-million barrel drop so confirmation of the API rise is likely to attract some negative price attention. Crude oil inventories meanwhile are surveyed to have dropped by 1.4 million barrels and if realised it would further confirm that the seasonal US inventory draw has begun a few weeks earlier than in previous years. Import and not least export data have also been attracting increased attention recently. Rising US exports and declining imports from key Opec members such as Saudi Arabia, Kuwait and Iraq will support efforts to reduce domestic US inventories. Falling US inventories due to less barrels hitting its shores and more leaving could slow the impact on Opec's global effort to bring global inventories down to longer-term averages. US producers' ability to restart and increase production has been a major source of surprise during the past six months. The continued rise since last October currently provides the biggest obstacle to the Opec-Nopec's re-balancing effort. Since October, the weekly estimate of US production - revisions can be expected - has risen by 785,000 b/d representing an average weekly rise of 30,000 b/d. Projecting this rise forward US production could exceed 10 million b/d by the end of the year. This however is not likely to happen with the EIA currently projection that end of year production will each 9.64 million b/d end 2017, still an 860,000 b/d increase over the year. The fundamental outlook has improved somewhat during the past few weeks as US inventories drop and the cutting efforts begin to be felt. As long we do not get any negative surprises in terms of demand, the price is likely to settle back into its recent range with the upside still capped. An extension of the current deal to cut production is more or less priced in but as the price rallies, the urgency among Opec members to extend is likely to fade. This is also partly due to the cartel's frustration with the lack of non-Opec compliance. From a technical perspective we are looking for a technical reaction back to $51.20/barrel on WTI and $54/b on Brent crude. Failure to reach these targets - WTI is so far finding support already at $52.17/b - would signal a strong market where short positions are looking to cover shorts into any signs of weakness. While the gross-long only saw a modest 38-million barrel reduction, it was the 139 addition of new short positions which eventually helped trigger the recovery

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