Crude Oil, WTI, RBOB Crack Spread, OVX, OPEC+, EIA – Talking Points
- Crude oil tumbled overnight as markets weigh pending summer demand
- EIA inventory data would normally have been supportive, but it was ignored
- The dynamics within the futures market might be saying something. Will WTI wilt further?
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Crude oil slipped lower overnight, filling in the price gap created when OPEC+ announced a cut to production earlier this month.
The inability to hold the gains post the squeeze could be suggestive that demand for energy may not be as strong as anticipated going into the Northern Hemisphere summer.
The structure of the WTI futures market might be leaning toward further weakness if the relationship with RBOB crack spread is maintained. This is the gauge of gasoline prices relative to crude oil prices and reflects the profit margin of refiners.
RBOB stands for reformulated blendstock for oxygenate blending. It is a tradable grade of gasoline. If profitability decreases for refiners, it may lead to less demand for crude.
The OVX index measure volatility in the WTI futures contract in a similar fashion to the way the VIX index is an indicator of volatility on the S&P 500 index.
The move lower in the WTI futures contract saw volatility tic up but it remains relatively subdued. This may suggest that the market is non-plussed about this pullback.
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In terms of the demand and supply dynamics, the market appears to be somewhere near equilibrium looking at the front two futures contracts. The price difference between them is only slightly in backwardation, possibly reiterating the market’s comfort level of the current pricing for oil.
Data released by the US Energy Information Agency (EIA) overnight should have been supportive of black gold. The stats revealed that inventories fell by 5.054 million barrels in the week ended 21st April rather than a dip of 1.486 million barrels as anticipated.
The fact that crude fell despite the slide in inventories may highlight the underlying issues that OPEC+ might have identified that led to their production cut. The price is now back to where it was before the announcement.
With the gap filled, oil could be in a range trading type of environment for the time being.
WTI CRUDE OIL, CRACK SPREAD, BACKWARDATION/CONTANGO, VOLATILITY (OVX)
Chart created in TradingView
— Written by Daniel McCarthy, Strategist for DailyFX.com
To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter