TD Securities commodity strategists Ryan McKay and Bart Melek note that crude Oil flows through the Strait of Hormuz are gradually normalizing, but around 10–11m b/d of Middle East production remains offline.
With US inventories drawing rapidly and CTAs (Commodity Trading Advisors) only modest sellers, they argue that heavy speculative short positioning could fuel a recovery in WTI and Brent prices if output does not rebound soon
Tight supply and CTA shorts collide “Watch the tanker entries and new loadings. While flows transiting the Strait continue to increase, our read of fresh tanker loadings in the Mideast Gulf sits around 3.5m b/d this week, led by Kuwait, the UAE and Iran.” “These loadings are the best indication of where flows will revert to once the stranded cargoes exit the Strait. As of now, the vast majority of tanker entries remain the Iranian and/or sanctioned tanker fleet, and our read of Mideast production still points to roughly 10-11m b/d of production offline.” “Meanwhile, global inventories continue to drawdown at a fast pace, with another 15m barrels withdrawn from commercial and SPR storage in the US.” “CTAs remain modest sellers of crude oil, while spec positioning as a whole has become dangerously skewed short.” “Without a swift recovery in Middle East production in the coming weeks, continued inventory draws and bloated short positioning will create an ideal setup for a recovery in crude oil prices.” Author