Oil prices bounced overnight as investors turned optimistic that the US Congress may resume stimulus discussions that have been stuck in the swap. Lawmakers were all ears after a chorus of US Federal Reserve committee members were again at pain to point out the need for additional fiscal support.

And cries from the world’s top central banker Jerome Powell struck a chord during this week’s testimony to Congress and the Senate.

Lawmakers in contentious election battles can ill afford the negative press around Congress’ dithering during the next 6-week election run-up. A US stimulus package pre-November election is very much underpriced and could be a significant catalyst for oil’s demand function and could punch prices higher.

Also positive for the view, hundreds of billions of dollars in unused funds from a $2.3 trillion coronavirus aid package could be re-allocated to help US households and businesses, Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin said on Thursday.

The stimulus news could not have come at a better time. Oil market demand has been getting clouded by re-imposition of soft or rolling mobility restriction globally, causing panic in the pit that circuit breaker type lockdowns could happen.

But lawmakers show little appetite to step back in the Covid-19 economic abyss by reimposing draconian lockdowns and hope that self-governing stay at home mandates will suffice.

Amore extended stay at home mandate will delay the services sector’s recovery which is lagging manufacturing across economies. Such divergences will likely persist if governments react to rising daily Covid-19 cases by tightening social-mobility restrictions, which is very harmful to oil demand.

Supply-side fundamentals lend support

Again, its been another week where traders have been inundated with dreary demand news, but it was supply-side fundamentals that supported crude oil again this week.

Prices have been backed with the Department of Energy (DOE) inventory stats showing a crude draw and the same a significant drop in gasoline stocks.

Supply is far less of a problem to the view than demand. Robust compliance from OPEC+ on cuts and limited upside for US production should keep supply below demand in for the foreseeable future and help global inventories move in the right direction.

However, the vast uncertainly is all about which direction sentiment turns. Traders will remain sensitive to news flow on the coronavirus and the global economy.

Demand needs to pick up

It is fair to say several bearish factors have led to the crude price rally stalling in recent weeks and could overhang the market in the coming months, but demand weakness is the primary angst.

Weak end-user demand is reflected in dreadful refining margins is a worry. Distillate stocks are still abnormally high, and there are signs of the diesel demand recovery faltering.

This year’s Achilles heel month of September got sorely magnified through the Covid-19 lens after traders ran headlong into the shoulder season.

However, supply-side dynamics are incredibly supportive and should get reflected in a strong downtrend in inventories over the next few months as winter demand for heating oil picks up.

Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp