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Oil Falls as US Production Rises; Declining Exports Point to Continued Builds

WTI futures have fallen roughly 10% since January 25th as US oil production ramps up. Recent reports out of the EIA show production climbing to 10.251 million bpd from 9.919 million bpd. WTI, Brent, and Dubai crude continue their sustained backwardation despite the rise in US production. OPEC’s Monthly Oil Market Report released today acknowledges the rise in US production but points to OPEC compliance and rising global demand, particularly in Europe, as offsetting factors. OPEC’s report suggests global inventories will continue to draw on average for the remainder of the year with a balanced market occurring at the end of 2018.

EIA data argues OPEC’s 2018 goal for balance will be hard fought. Overall, global supply and demand forecasts show an oversupplied market for 2018. Estimates for February and March have demand outpacing supply by 2.06 million barrels, but the remainder of the year shows a tight or thoroughly oversupplied market averaging a demand-supply differential of -470,000 bpd.

Building on the EIA’s negative outlook, we wouldn’t be surprised to see continual builds in commercial crude oil inventories as US exports are expected to decline on shrinking global arbs. WTI enjoyed a relatively large discount to Brent and Dubai crude beginning in August/September, which spurred a growth in exports. The Dubai-WTI spread has fallen toward 2017 lows and the Brent-WTI spread is testing 2017 highs.

WTI technicals are approaching oversold territory and could argue for a bounce. The US Dollar Index is trading near the upper end of a range formed in the second half of last week. $90.50 is providing round-number resistance for the dollar while support has formed above $90.00. Gold futures have begun consolidating after two weeks of moderate selling pressure and are trading in an upward channel with support near $1318. A break above $90.50 for the dollar and a break below $1318 for gold should see additional selling pressure enter the crude market. Alternatively, a break below $90.00 in the dollar and continuous bullish price action in gold will be supportive of oil prices.

ULSD futures are testing support at $1.86-$1.85 after breaking through trendline support near $2.00 and horizontal support at $1.95. Price continues to work sideways as traders wait for analyst forecasts for commercial crude inventories. ULSD technicals are firmly oversold suggesting technical traders may begin accumulating long positions should the fundamental environment turn bullish.

Speculative sentiment for WTI futures has shown a moderate decrease as hedge funds reduce their net long exposure by -14,997 contracts. Despite the drop, hedge funds appear hesitant to take bearish positions as the number of short contracts decreased from 36,765 to 32,358. The aversion to shorts indicates that recent downward pressure in WTI can be attributed to profit taking.