Looking to the Futures
Short-Term Oil Demand Returns but EV Transition Looms Longer-Term
Crude oil futures are poised to post solid gains of over 7% for the week as the June 2021 contract traded near $63.75 a barrel Friday morning. Wednesday’s U.S. Department of Energy crude oil inventory report seems to have been the spark needed to advance crude oil futures out of a month-long channel near $60. Wednesday’s data prompted traders to bid the June 2021 crude oil contract $1.50 higher within minutes of the announcement.
The inventory update showed a much larger drawdown in supplies than had been expected, especially in the U.S. East Coast region where stockpiles were reported at multi-decade lows. Refinery utilization was reported to ramp back up to pandemic-era highs as demand for transportation fuel is anticipated.
Other encouraging data emerged this week that helped reinforce Wednesday’s advance, including Thursday’s initial jobless claims report which continued to downtrend to pandemic-era lows. March retail sales data also beat expectations, growing 9.8% over the prior month. The Department of Transportation reported miles traveled on U.S. highways were up 1% over the same period two years ago, which is the first positive reading for this metric since the pandemic.
Looking to global supply variables, Iran is pushing to re-engage a 2015 nuclear agreement that could lead to the lifting of sanctions on their crude oil exports. OPEC’s spigots may soon be ratcheted up as waning production controls lean into higher-priced oil.
While most crude oil price speculation is centered on short-dated contracts, forward-looking research has become an interesting topic as the world considers the electrification of transportation as a desirable environmental alternative. While there won’t be any substantial changes to fossil fuel demand in the short-term, the industry is grappling with the possibility of this transition.
Outlooks reported from Bloomberg this week, citing Goldman Sachs research, call for a crest in transportation-based oil demand peaking around 2026. While other needs for oil will still exist through the petrochemical supply chain and jet fuel, EV adoption could play a pivotal role in oil demand for the decades to come. Other research published by Wood Mackenzie offers up scenarios where oil consumption starts to taper off within the next few years due to aggressive electric vehicle adoption. Each year could see a 2 million barrel per day reduction in oil demand, taking prices down along the way and possibly rendering sub-$10 per barrel oil by the year 2050, according to the report.
And speaking of lower prices, WTI crude oil futures are currently in a condition known as backwardation, where near-dated contracts trade at a premium to longer-dated contracts, shown below. Looking at the spread between the June 2021 and June 2022 contracts, June 2021 currently trades at a $4.87 premium over the longer-dated contract. December 2021 is trading at a $9.24 premium over December 2026.
The next CFTC Commitment of Traders Report will come out in the afternoon on Friday April 16. The report reveals positioning by futures market participants including money managers and commercial traders.
The most recent CFTC data, as of April 6, showed that money managers held net long futures and options positions equivalent to 360,647 long futures contacts. This measure was above the one-year average but just below the high from March 16 of 393,019, which was the highest reading in 33 months. The net long bias of investors has remained elevated over the past year.
Crude Oil Futures
NYMEX WTI Crude Oil futures (ticker CL) year-to-date futures volume through March was 67 million contracts, down about 29% year-over-year. March 2021 volume was 26 million contracts, 18% more than February but aided by more trading days. Each contract controls 1,000 barrels of crude oil and settlement at expiration is through physical delivery.
Margin requirements for June 2021 crude oil futures are currently set at $7,623, representing roughly 12% of the contract value. A half-sized E-mini futures contract is also available, controlling just 500 barrels (ticker QM).
Oil Futures Options
Implied volatility on crude oil futures options has dropped to lower levels since the spike last spring. A sampling of implied volatility for the options expiring May 17 shows near-the-money options carrying IV in the low-to-mid 30’s. Looking at leading open interest in out-of-money contracts we see 13,969 open in the $70 calls and 15,490 in the $55 puts.
The CBOE Crude Oil Volatility Index ($OVX) measures the market’s expectation of 30-day volatility of crude oil futures prices using the VIX methodology on the United States Oil ETF (USO) options, and currently has a reading near 36. The average reading for this gauge over the last six months and one year is near 42 and 54, respectively.
June 2021 Crude Oil Technicals CLM21
Looking to the chart data, oil technicians may see the June 2021 WTI oil contract flash a bullish sign as it crossed over the 40-day moving average, as reported by Hightower research. Other encouraging observations include the close above both the 9-day moving average and the second swing resistance. The RSI reading of 60 tilts to slightly overbought conditions.
Resistance 2 65.47
Resistance 1 64.34
Support 1 61.26
Support 2 59.31
SMA 9-Day 60.34
SMA 20-Day 60.43
SMA 50-Day 60.81
SMA 200-Day 48.73
RSI 10-Day 60
Baker Hughes Rig Count 04/16/2021 1:00 p.m. ET
EIA Crude Oil Report 04/21/2021 10:30 a.m. ET
EIA Natural Gas Report 04/22/2021 10:30 a.m. ET