Crude futures: more pressure
/The latest US drilling rig count has dropped to 1,019, according Baker Hughes. This is almost 40% lower than early October highs. And yet, both crude benchmarks featured on the downside lately. ICE Brent prices slipped back below USD 60/bbl. At a USD 8 discount to APR6, the market’s contango is trading little different from the prompt month’s discount observed earlier last week.
As highlighted before, the market in London tends to trade on sentiment. The late price correction in London was to be expected, given little new developments on the geopolitical front as far a Iraq or Libya are concerned.
US stockpiles continue to build (at another record high las reported by the EIA last Thursday). At the same time US refineries were also taking less crude due to sever weather which should also filter through to the weekly inventory estimates going forward.
As much as the ever declining number of operating rigs matters in the long run, for the moment US supplies continue to grow while producers boost efficiency and delay completions. Generally, as soon as the late cold snap passes and the weather improves we will also be heading for the seasonal slowdown in refining activity in the Northern Hemisphere.
The ever choppy derivatives market had once again caught up with its physical counterpart or rather its short term fundamentals. In the short run, plentiful supplies continue to paint a bearish picture. In our view, this situation is unlikely to change until late spring with a sustained price rebound still sometime away. We would, certainly, keep an eye on the transatlantic spread for the first signs of change in the US fundamental picture. Brent’s physical premiums to regional benchmarks this side of the Atlantic will also help to gauge the domestic refining demand outlook.
In the meantime, we still see the market slipping lower, driven mostly by macro headlines or developments on the geopolitical front. Bullish fundamental signals are unlikely to materialise in the very near future and volumes are set to remain relatively light.
London's Brent future is supported near USD 55/bbl and then USD 48/bbl with resistance back near USD 63/bbl.