Oil Mixed As Traders Wait For Stronger Catalysts

Oil Video 20.07.20.

U.S. Rig Count Continues To Fall

The recent Baker Hughes Rig Count report showed that the number of U.S. drilling rigs declined by 5 to 253. The number of U.S. rigs drilling for oil declined by 1 to 180.

Interestingly, current WTI oil prices have so far failed to stop additional declines in the number of U.S. drilling rigs. One of the main risks for the oil market is a rapid increase in U.S. oil production which has currently stalled at 11 million barrels per day (bpd).

The falling U.S. rig count is a bullish factor for the oil market since it shows that current oil prices are not attractive enough to employ more drilling rigs and increase production levels.

The most recent inventory report showed that crude oil inventories decreased by 7.5 million barrels. At this point, it looks like U.S. oil producers are not ready to increase production at current levels. The key question is whether demand was hurt by the recent surge in the number of new coronavirus cases in the U.S.

In case demand recovery continued, crude oil inventories will have a good chance to fall materially from current levels, providing more support to oil prices.

Has The Oil Market Found A Balance?

While a volatile commodity like oil can experience periods of consolidation from time to time, the current situation in the oil market is highly unusual given the current circumstances.

With so many moving parts including the speed of economic recovery, the rising number of new COVID-19 and hopes for a vaccine (AstraZeneca has just reported positive Phase 1 trial results), oil could have easily experienced more volatility. Instead, it remains glued to the $40 level.

Currently, it looks like the oil market has found a balance in which positive and negative catalysts outweigh each other. On the one hand, the economic recovery continues to progress while biotech companies report positive early-trial results for their COVID-19 vaccines.

On the other hand, the number of new coronavirus cases continues to rise, increasing risks of new lockdowns which will hurt oil demand. In addition, inventories remain at high levels and put pressure on the potential oil price upside.

For now, no catalyst was able to tip the scales but it’s hard to expect that the current fragile balance will last long.

For a look at all of today’s economic events, check out our economic calendar.