OIL: The Bullish Picture Brightens – iPath S&P Crude Oil Total Return Index ETN (NYSEARCA:OIL)

Investment thesis

Despite recent oil market correction and dipping net speculative positioning on NYMEX crude oil contracts, the iPath S&P Crude Oil Total Return Index ETN (OIL) remains sustained, following growing tensions in the Middle East and declining crude and refining stocks.

Source: Bloomberg

OIL – iPath S&P Crude Oil Total Return Index ETN

OIL is a proxy of the American crude oil benchmark, West Texas Intermediate (WTI) and tracks the performance of its underlying index, the S&P GSCI Crude Oil Total Return Index. The fund offers plain-vanilla oil futures exposure and rolls its expiring contracts into the next nearest month contract.

As you can see below, OIL returns replicate thoroughly WTI performance:

Source: Nasdaq

Besides, the main drawback of OIL is its high concentration on the crude front-month contract, which can incur heavy roll costs. Nevertheless, the ETN offers the closest possible experience to spot oil, with cheaper fees than its peers.

Crude and petroleum stocks

According to latest EIA report, American crude inventories decline slightly, down 0.84% (w/w) to 466.6m barrels on the April 26 – May 3 period, whereas Cushing stocks rose 1.82% (w/w) to 46m barrels. With that, crude oil seasonality enhances marginally (w/w), reaching a 7.6% or 32 846k barrels surplus compared to 2018 stocks, but maintaining a marginal deficit on a 5-year basis of 2.3% or 11 208k barrels.

Source: Historic Stocks of Crude Oil Report – EIA

Concomitantly, refining petroleum inventories posted a marginal decline on the corresponding period, sending superior oil product stockpiles in a sturdier deficit than in the previous week. Indeed, while distillates decline marginally, down 0.13% (w/w) to 125.6m barrels, gasoline storage lost 0.26% (w/w) to 226.1m barrels. This is explained by slower refining utilization rates in the first quarter of the year and sanctions on Venezuela’s crude, essential for blending US shale output.

Source: Weekly U.S Refining Utilization Rate

In addition, US crude output slightly declined over the week to 12.2m barrels per day, despite the historic high touched the previous week. Meanwhile, crude oil balance slightly deteriorates on a weekly basis, following strong oil export dip, down 11.07% to 2.32m barrels, partly offset by declining imports, down 8.9% to 4.37m barrels.

Source: Weekly Imports & Exports Report – EIA

In that vein, declining crude/refining storage and steadying US oil output are marginally sustaining crude futures and OIL shares; however, increasing uncertainties on risky assets should totally offset it.

Speculative positioning

Source: CFTC

Latest speculative positioning on NYMEX crude futures shows a strong weekly dip on oil contracts, down 5.68% to 494 336 contracts, on the April 30 – May 7 period, whilst OIL shares declined slower, down 3.42% (w/w) to $64.25 per share.

This second consecutive weekly dip is due to the same catalysts as last week, namely robust short coverings, up 7.23% (w/w) to 122 453 contracts, partly counterbalanced by moderate long liquidations, down 3.37% (w/w) to 616 789 contracts.

That being said, recent oil market correction is marking a pause and the horizontal trading pattern, which has developed in the last few days, indicated renewed bullish interest.

Since the beginning of the year, net spec positioning advanced robustly, up 78.32% or 217 125 contracts, whereas the OIL’s YTD performance lifted 22.28% to $62.94 per share.

Fundamental changes

Since my last article published on March 26, OIL advanced moderately, up 5.07% to $63.18 per share, despite recent market volatility triggered by rising trade tariffs between the two economic giants. Nevertheless, supply disruptions and curtailments in Venezuela, Iran and Libya contributed to sustain crude oil markets. Additionally, mounting tensions in the Middle East, with the latest attack on key Saudi oil installations and potential oil disturbances in the Strait of Hormuz, representing 30% of the world’s crude shipments, should continue to sustain OIL shares in the near term.

According to New York Fed crude decomposition, crude demand growth slightly decreased in the beginning of May. However, declining supply largely offset it. That being said, there are plenty of reasons to think the tightness in physical markets will persist at least for a while.

Source: New York Fed

Besides, the crude oil futures curve flattens on nearby maturities, indicating growing crude market uncertainties. Nevertheless, oil backwardation steepens on follow-up maturities, which is positive for OIL shares.

Despite declining net spec positioning, with the latest bullish geopolitical developments and weakening crude/refining storage in the US, tailwinds on crude markets should persist. In this context, I maintain my long-term long view on OIL shares.

I look forward to reading your comments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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