COLUMN John Kemp - Reuters News: Oil rally loses momentum

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COLUMN-Oil rally loses momentum: Kemp - Reuters News


10-May-2016 14:44:36


(John Kemp is a Reuters market analyst. The views expressed are his own)


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    By John Kemp

    LONDON, May 10 (Reuters) - The rally that carried oil prices

up by more than $20 per barrel between the middle of January and

the end of April seems to have run out of steam for the time



    Spot crude prices, time spreads and refining margins have

all showed signs of weakening since the start of this month.

Crude prices are struggling to rise further despite signs of

continued growth in consumption.


    Prices for both WTI <CLN6> and Brent <LCON6> futures with

delivery dates in July peaked at the end of April and have been

gradually falling.


    Prices for both futures contracts yesterday closed below

their 14-day and 20-day moving averages for the first time since

early April illustrating how the rally has run out of momentum



    Timespreads, which tend to track the supply-demand balance,

have eased since the end of April after tightening progressively

since the start of the year (


    Short-term interruptions to crude output, ranging from the

wildfires in Alberta to problems with Libya's exports, have

failed to provide a sustained boost to either spot prices or



    Refining margins have also started to soften which could be

a bad sign for oil demand if they encourage refiners to cut

crude processing (


    In the United States, the generic 3-2-1 crack spread

<CL321-1=R>, which measures the gross revenue from turning three

barrels of crude into two barrels of gasoline and one barrel of

diesel, has fallen from $19 to around $15.50.


    Valero, the largest independent refiner in the United

States, reports indicative margins for its refineries along the

Gulf Coast have dropped from $20 to less than $17.


    After firming progressively since February, indicative

margins for refineries in the mid-continent area slipped last

week from almost $13 to less than $11 (“Key commodity prices and

differentials”, Valero, May 2).


    In the last couple of weeks, U.S. refinery throughput has

slipped below the record rates reported at the same time a year

ago (


    Hedge funds seem to sense the rally may be running out of

momentum, and have closed some bullish long positions, taking



    Hedge funds and other money managers reduced their record

net long position in WTI and Brent futures and options from 663

million barrels on April 26 to 620 million barrels on May 3.


    Long positions were cut by almost 38 million barrels while

short positions were increased by more than 5 million barrels



    Profit taking was especially pronounced in Brent, where

hedge funds and other money managers cut their long positions by

28 million barrels, or around 6 percent.


    Across the three major WTI and Brent contracts, hedge funds

cut their net long position by 43 million barrels, the largest

one-week decline since November 2015.


    The concentration of hedge fund positions on the long side

of the market has increased the risk of a price reversal as a

result of long liquidation (“Risks rise as hedge funds place

record bet on oil”, Reuters, May 3)


    The oil market is heading into the strongest period of

demand in the year as the U.S. driving season begins at the end

of the month which should provide some support to prices.


    But at the moment attention has shifted away from the

decline in crude production and growth in demand to the overhang

of refined products such as gasoline and diesel, causing the

rally to stall.



John Kemp


Senior Market Analyst