By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia
Yesterday’s DOE data showed a sharp fall in total U.S. product inventories, which amounted to 14.5M bbl when we account for the SPR withdrawal. Of note, there were substantial crude draws in the U.S. East Coast (0.7M bbl) and Gulf (2.4M bbl) regions, but both saw an increase in total motor gasoline inventories over the previous week. Across the United States, there has been a sharp uptick in gasoline demand to 9.2M bbd last week (up from 8.5M bbd), which is likely to have been assisted by a $0.86 drop (17%) in the U.S. average retail gasoline price easing price pressure on demand over the last six weeks. We reported yesterday that the SPR supply was a key suppressor of U.S. oil prices vis-à-vis Brent, and we are now expecting market reaction to the Fed’s 75bps increase in interest rates. A hawkish Fed would likely see benchmark selling, but that Jay Powell said the pace of rate hikes will slow at some point gave confidence to markets; lending flat price support to commodities this morning.
Taking a deeper dive into possible market direction at such a juncture, it is worth examining what data the futures and options markets are providing as signals. We are seeing a weakening of the market structure down the forward curve, with WTI’s Dec/Dec spread narrowing towards $9/bbl (down from a high above $17/bbl and approaching the post-invasion low of $7.20/bbl). This indicates that markets are still expecting higher inflation and future interest rate rises to dampen demand, even if retail fuel prices are easing as they have been in recent weeks. Over the last six weeks, we have also seen a reduction in the non-commercial net long in both Brent and WTI; the combined position is still bullish but about 15% less so than two months previously - reflecting a shift to risk-off amid heightened price concerns. Options in both Brent and WTI are showing a substantial put bias in terms of skewness, which indicates to us that markets are anticipating a further weakening of prices after peak summer demand draws to a close. One final factor to be aware of is the likelihood that the ride will continue to be wild; implied volatility is at around 47% in WTI, which is down from this month’s high of 53% but remains elevated due to suppressed total open interest which currently stands close to 1.6M (down by almost 1M contracts in 14 months).
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