Oil prices stood out the most curious among all after gushing to a five-month high with Brent chart-topping in at $46.23 per barrel. The weaker US dollar offered a reliable lending hand.

The oil market continues to find support from strength in the broader markets with the S&P nudging higher again. And crude stocks fell 7.4 million barrel, which is bullish versus the consensus for a -3.0Mb draw but below the -8.6Mb draw reported by the API Tuesday.

Sure, I get it, the dollar is weaker, and since oil is priced in dollars that is good for oil, and those in the US unemployment line will surely be guaranteed their employment stipend on a retroactive basis.

Political squabbling in Washington

But right now, top lawmakers remained nowhere close to an agreement for a new economic rescue package, with disputes over funding the United States Postal Service added to the laundry list of bipartisan squabbles.

Then again, the political discord in Washington is oddly helping oil’s cause these days due to the growing disdain for the US dollar.

Still, I need to continually remind myself that history teaches that it is unwise to craft a narrative to rationalise August’s market behaviour. Again, I think there was enough under the hood for markets to test the top end of the range this week a jobless recovery notwithstanding.

Many of the overnight headlines regarding the US risk centred on talks, be they fiscal negotiations or US-China trade talks. But what the market cares about is action.

On the fiscal front, amid the stammering progress, there is light at the end of the tunnel as While House negotiators said they aim to reach a deal on a new coronavirus-relief package by the end of the week.

US- China trade talks

On the trade front, US and China trade officials will hold virtual talks on 15 August as part of the trade deal’s review process. The talks come at a time when China’s pace of energy imports from the US are falling well short of that required to hit the targets set in the deal.

However, it does not appear that the US is seeking to increase pressure on this front. US trade negotiator Lighthizer said China has made “significant purchases over the course of the last many weeks.”

The multiple headlines did not negatively shift the key trade war bellwether Yuan. The Yuan rallied, which is a favourable signpost for risk assets and oil. Indeed, removing the trade war risk is ultimately beneficial for oil prices.

So far, cyclical economic data indicates that the coronavirus-related economic slump appears less acute than expected as the world economy continues to recover rapidly from the corona crisis, which is favourable for oil.

At the same time, the rising OPEC+ and US production still represent a near-term threat to the view. But with at least the OPEC+ side of the supply equation well understood, investors may feel supply risks are already priced in. All the while, oil investors keep their eyes on the prize, which is a vaccine, of course, as there is a good chance that we will be on the verge of approval of a COVID-19 vaccine before the year is out.

Lower inventory level

Overnight the EIA confirmed the API survey data as crude inventories decreased for the second consecutive week – they are now down bullishly 18mb in two weeks, and thankfully, the industry is starting to show a clear downward trend.

However, providing the poor optics and capping last night’s scintillating and profoundly unforeseen oil rally is the glaring issue that product stocks are still building, – total product stocks are up to 129mb (16%) since March and distillate stocks up 56mb (45%) over the same period.

Indeed, gasoline demand has all but hit a brick wall as demand has ground to a halt for now.

While it remains clear, the worst-case scenarios from 2Q have been ruled out. Still, the skies are not entirely blue, and a shortage of contrails reminds us that a significant product demand is absent as airline fleets around the world remain grounded as jet fuel demand remains exceptionally depressed.

Although we traded above $46 overnight, the risk/reward still seems skewed to the downside in the near term, with supply and demand factors both potentially weighing on oil in the coming weeks.

The direction for oil in 2H will depend mainly on the willingness of traders to look through the short-term supply and demand uncertainty as gasoline demand has ground to a halt for now, and the summer season driving clock is ticking.

But in this environment, traders may be content to focus on the ongoing market rebalancing. The recent surge in virus cases and the re-imposition of some virus control measures will moderately slow the economic recovery in the near term but expect the recovery to get back on track in September, assuming virus developments don’t prompt the re-imposition of widespread lockdown.

But ultimately, traders will continue to train their eyes on the ultimate vaccine prize.

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