Oil prices appear to be in the right spot, possibly poised to take the next step higher and forge a new trading range above Brent $45.00 after US crude stocks fell for the third consecutive week and are clearly on a downwards trajectory.
And with product stocks decreasing, favourably for global oil prices, it suggests the demand recovery is continuing to grind higher.
Most of these draws did occur in PADD 3 (Gulf Coast) as net imports start to normalise. However, Cushing (Oklahoma) stocks have risen for 6 consecutive weeks – up 7.7mb (17%) over that period – although we are still far from concerns over hitting ‘tank tops.’
But production curtailments either planned or forced continue to provide the Oil market with the most significant backstop.
US crude production falls
US crude production fell due to the re-benchmarking to the EIA’s Short-Term Energy Outlook’s latest monthly figures, which were lower than previous estimates. Subsequently, US crude production is estimated to be below the March high.
While complimenting that view, the oil rig count fell last week to reach a new low – down 74% since the start of the year. Just 176 rigs are operating across the US compared to the cycle high of 888 in 2018. And the OPEC + agreement is working as intended.
Oil prices are artificially propped up through OPEC + intervention and US curtailments.
So, oil market sentiment continues to trade in line with the broader markets where risk continues to flourish as investors turn a blind eye to the lack of immediate progress in the negotiations for another stimulus package in the US, but aware that one is coming.
Trade talks? No worries
But even worries around stalled US fiscal talks are partly offset by the US administration’s conciliatory tone on China’s compliance with the “Phase One” trade deal.
The upcoming six-month assessment seems unlikely to prompt any significant fireworks. Also, investor’s optimism remains high on a vaccine cure that is no longer being viewed as a pie in the sky.
Finally, the US dollar’s weakness helps Oil prices in general, but even more so in this environment, as the weaker US dollar reflects a global “risk-on” environment, not a flagging US economy.
It appears the oil markets ladder is well buttressed, so why aren’t Crude prices climbing higher?
Global COVID-19 cases now exceed 20 million, so in the absence of meaningful progress on a Covid-19 vaccine, traders are still looking over their shoulder to where new lockdowns might be necessary. And given the transitory nature of US production, any rebound in US shale output will complicate the bullish view.
Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp