WTI crude (CLH5: $51.2 +3.2%) and Brent crude (LCOH5: $56.7 +3.6%) are trading higher for a third day as they continue to find support from the strike action at refineries in the US and a slump in Libyan exports. The potential for reduced supplies of motor fuel have led to strong rallies in gasoline and gas oil, which have in turn supported crude oil.

Investors worried about missing the rally have been piling back into energy stocks and ETFs; tracking the futures price during the past few days, it seems as if the positive momentum this has created could carry it further in the near-term.

Fundamentals remain shaky but oil markets have picked up

Brent crude and ICE gas oil are the two main drivers at the moment and as a result, Brent’s premium over WTI has risen to $5.6/barrel not least based on the assumption that reduced refinery demand due to strikes will further increase US inventories of crude oil.

Also adding support to Brent is the deteriorating situation in Libya, which has seen oil exports shrink to their lowest level in six months. The next weekly inventory report due on Wednesday will cover the week before the strike action began.

Crude inventories are nevertheless expected to rise by 4.5 million barrels (Bloomberg survey) while a small reduction in gasoline and distillates are expected. A survey of crude oil movements in and out of Cushing is estimating that inventories rose by more than two million barrels to a one-year high last week.

Momentum Indicators – Metals and Energy

After more than 200 days of declines, we have now seen Brent and most recently WTI crude yesterday return to positive momentum. Fundamentals, however, do not justify a major recovery at this stage considering expectations that the global supply glut could rise even further over the coming months. Rising crude oil prices will make it possible for many shale producers to restart their forward hedging at profitable levels and thereby maintain production levels.

Fundamentals are one thing, another is the current momentum which is pulling short positions out of the market. The next three levels to look out for to the upside are the two retracement levels at 51.28 (reached) and 53.10, followed by trendline resistance at $55.

Source:  Trading Floor