We Might Have The Low In Oil Tomorrow At The Open


Summary

The API reported an inventory build this week, however, last week they had a huge draw.

The EIA last week had a small draw and reports at 10:30AM Wednesday.

It is very possible that the API numbers are fudged week to week due to when they account, so, we could see EIA with a draw.

The Fed will likely be dovish tomorrow and might even surprise with no rate hike.

If EIA shows a draw tomorrow, especially of about 8m barrels representing 2-week differences with APi and new Saudi cuts, that could mark the bottom in oil prices.

We have taken it on the chin with oil even though America is unique in having built oil inventories the past several months. The rest of the world did not. Our inventories are a direct result of Saudi Arabia increasing exports to the U.S. in response to the Iran sanctions and at President Trump’s request.

Tomorrow is the EIA oil inventory at 10:30AM Eastern. It usually has a disparity with the API ( American Petroleum Institute ) oil report which is released a day earlier. 

Today’s API report had a surprise build of 3.45mb for the week ended December 14th. The expectation had been a draw of 2.475mb. Last week the API reported a draw of 10 million barrels while the EIA showed only a 1.2mb draw. 

What you can see with the reports is that there is usually some smoothing over time to bring the two reports closer together. I expect the EIA to show a draw tomorrow of up to 5mb, though 2-3mb is very likely.

If the EIA shows a draw, that will quell the massive sell-off in oil today. That sell-off had all the makings of capitulation. Also, remember, hedge funds are just about wound down at this point – as I discussed in 4 Pieces Of Missing Money Crushing Markets.

If there is a draw according to the EIA and the Fed is dovish, I would expect that we have finally seen the bottom for oil. If those things do not happen, then we could have some residual downside to oil, although it makes sense that we are getting close to the point where Saudi and Canadian import cuts start to make a dent in supply. 

In the event it the EIA and Fed both follow the script, I will put my last chips in on oil where I have room in asset allocations. I’ll focus on the Permian stocks, but also buy a few calls on the U.S. Oil Fund (USO).

Disclosure: I am/we are long USO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own USO calls.