Crude oil prices tumbled to their lowest level in a month this week and closed on Thursday at the lowest level since the initial OPEC agreement was reached last November. The catalyst for the collapse is widely viewed as the larger than expected build in US inventories for the prior week. Our assessment of this week’s reported data is that it contained several one-off events and we still look for US markets to tighten in the coming weeks. Nevertheless, the bigger picture remains one of still elevated inventory levels and only limited progress in drawing down excess stocks.

At the time of writing, the increasingly tense diplomatic stand-off in the Middle East Gulf (MEG) between Qatar and Saudi Arabia, The UAE, Bahrain, and Egypt, (the first three being members of the Gulf Cooperation Council), has had only a limited impact on prices. While the modal view at this juncture is for a diplomatic resolution of the issues, this analyst believes that ignoring these developments is best viewed as a mistake, given the importance of production in the region.

This week’s EIA data was unexpectedly poor. Builds in crude and products left US commercial oil inventories at 1,346 mb just 14 mb (1%) below the 1q peak seen in early February. Thus in the last four months, commercial oil stocks have drawn by an almost imperceptible amount. However, the weekly data incorporate a public holiday and this analyst has learned from experience not to read too much into such data points. Furthermore, there were some clearly unsustainable factors contributing to the overall movement in stocks, e.g., crude exports collapsing by 57% w/w to the fourth lowest level recorded this year and 28% below the ytd average.

For now, we maintain the base case view that the current Middle East geopolitical tensions will be resolved in the coming weeks with no further escalation in risks. However, the risk bias is clearly shifting to an upside price trajectory we and position ourselves accordingly. Moreover, while the US weekly data has disappointed, we expect next week’s report to show more sustainable inventory declines and note that there are signs in European and Asian product markets that inventories are being drawn down.

Having taken profits on our Brent put spread yesterday we initiate a set of bullish trade recommendations of being long outright WTI, Brent time-spreads and a Brent call spread position, and a gasoil crack as the risk reward of being long crude and select products appears attractive at this juncture.

Well, at spot reference: 44.55, contemplating lingering bearish indications, on hedging grounds we recommend shorting near-month month futures of WTI crude as the underlying spot prices likely to target southwards 43.72 levels in near run and 40 levels upon breach below 1st target.

Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.