Oil Price Fundamental Daily Forecast – There’s Been Much Focus on Tight Supply, but Demand is the Wildcard
U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging higher early Wednesday on the back of an industry report that confirmed a tightening in U.S. crude oil and product inventories. The news also offset worries over a surge in coronavirus cases while reinforcing the industry belief that demand will outstrip supply growth.
American Petroleum Institute Weekly Inventories Report
The American Petroleum Institute (API) late Tuesday reported a draw in crude oil inventories of 4.728 million barrels for the week-ending July 23, bringing the total 2021 crude draw so far to nearly 54 million barrels, according to the API data. Analysts were looking for a draw of 3.433 million barrels for the week.
In the previous week, the API reported a surprise build in crude inventories of 806,000 barrels, compared to an expected draw of 4.333 million barrels.
The API also reported a draw in gasoline inventories of 6.226 million barrels for the week-ending July 23 – compared to the previous week’s 3.307-million-barrel build. Distillate stocks saw a decrease in inventories this week of 1.882 million barrels for the week, on top of last week’s 1.255-million-barrel decrease.
Cushing inventories fell this week by 126,000 barrels, compared to last week’s 3.567-million-barrel decrease.
On Wednesday, traders are looking for the U.S. Energy Information Administrationi (EIA) weekly inventories report to show a crude oil draw of about 2.6 million barrels.
Although some analysts are saying that demand will outstrip supply growth and that the surge in COVID-19 infections is being offset by a rise in vaccinations, the price action doesn’t seem to support this notion.
The market seems to be underpinned by this idea, but at the same time, gains are likely being capped by those who expect to see some demand destruction. If bullish traders were confident in the prospect of increasing demand, one would have expected to see a breakout to the upside after last week’s strong recovery.
As of early Wednesday, both WTI and Brent crude oil are trading were they were on July 14. This is a little after the COVID-19 fears started to escalate and OPEC+ was debating its August output hikes.
There is no question that supply is tightening in the U.S., but COVID-19 cases are also rising and countries are taking steps to stem the spread of the virus. Australia is one example, where the government shut down a major city. Furthermore, economists are saying the Aussie economy is headed toward another contraction because of the fresh lockdowns.
Earlier in the week it was reported that global cases of COVID-19 have increased the most in two months with infections surging in the U.S., Brazil, India, Indonesia and the U.K. Meanwhile countries with lower vaccination coverage in parts of Asia are seeing more fatalities and renewed restrictions, posing a threat to fuel consumption and demand for oil.
Additionally, recent government data showed money managers cut their net-long positions in the U.S. crude benchmark by the most since 2017 last week as the delta variant shook broader markets.
In my opinion, saying demand will outstrip supply growth into the end of the year is a little pre-mature. Furthermore, it also indicates how quickly analysts forgot about how fast this virus can spread.