Oil gave ground in early Asia after a report showed a disconcerting increase in gasoline stocks as OPEC+ returns more barrels to market in August.

It’s challenging to make heads or tails out of the oil market these days. Other than to conclude that the most obvious fact is that the market is struggling to make new highs as demand concerns remain tethered to the hip of the coronavirus worries as OPEC returns 1.5 million barrels per day this month.

API reported a big build in gasoline inventories, which has somewhat taken the edge off the bullish market sentiment.

The timing could not have been much worse as we are entering the home stretch for peak driving season in the US. Summertime builds are never received well, but particularly towards the end of this summer as there is some concern the virus could rage again during colder winter months in the northern hemisphere and further crimping gasoline demand.

However, will it be enough to drive a big enough wedge between the broader brace from effervescent risk sentiment and the prospects for a much weaker US dollar to send oil lower?

Crude oil had rallied early in the NY session in tandem with US equities with the S&P 500 racing to an all-time high as robust US housing data added to the recovery optimism.

Also, with OPEC+ toeing the compliance line, it seems very unlikely they will allow Oil bears to snatch defeat from the jaws of victory.

OPEC sources suggest 97% OPEC+ compliance in July ahead of the JMMC meeting.

But the key for the compensation narrative, August compliance should be >100% as shortfalls earlier in the quota period are made up. But the overriding story for oil markets these days is the steep fall in volatility.

Still, the constant drumbeats around US-China frictions continue to temper the mood after President Trump told reporters, “I have postponed trade talks with China.; I don’t want to talk with them right now.”

It will be interesting to monitor the impact on oil prices of the US/China relationship in the coming weeks and months. Talks to review the phase-one trade deal between the US and China were due to take place last weekend but have been delayed indefinitely due to increasing tensions between the two nations.

Still, China has reportedly been ramping up purchases of energy products from the US, with 14mb/d of US crude due to be loaded next month for delivery to China. This even though Chinese crude inventories are at an extremely high level, with no real economic advantage for US crude over alternative suppliers in the Middle East.

On the surface, it suggests China is now trying to send a friendly signal. China bought ~4.2mb of US crude in May and June, but nothing in the previous five months resulted from the negative demand impact of the coronavirus and the escalating political conflict.

The problem here is that it is merely unclear where we go next, and this adds to the growing list of issues keeping oil traders in flip the coin mode.

And if the current situation sounds confusing, well, its because it is.

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