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James Hyerczyk
WTI and Brent Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading sharply higher on Wednesday on the back of a private industry report that showed a big drop in U.S. crude inventories. Traders are still following through to the upside after the release of the report late Tuesday in anticipation of another bullish report from the government later today.

The rally is coming as a surprise to the short-sellers who were caught off by the report as they placed their bearish bets on concerns that mounting coronavirus infections will lead to reduced fuel demand.

At 11:25 GMT, September WTI crude oil is trading $43.01, up $1.31 or +3.14% and December Brent crude oil is at $46.26, up $1.02 or +2.25%.

American Petroleum Institute Weekly Inventories Report

The API reported on Tuesday a draw in crude oil inventories of 8.587 million barrels for the week ending July 31. Analysts were looking for a modest inventory draw of 3.267-million barrels.

The API also reported a draw of 1.748 million barrels of gasoline for the week-ending July 31 – compared to last week’s 1.083-million-barrel build. This week’s draw compares to analyst expectations for a 170,000-barrel draw for the week.

Distillate inventories were up by 3.824 million barrels for the week, compared to last week’s 187,000-barrel build, while Cushing inventories saw an increase of 1.63 million barrels.

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Short-Term Outlook

While the huge unexpected drawdown in crude oil inventories was a nice surprise, the even bigger gift for crude oil bulls was the surprise drawdown in gasoline inventories. It helped alleviate some of the downside pressure in crude oil due to the demand destruction from the surge in COVID-19 cases.

From now until the U.S. contains the spread of the coronavirus, the focus will be on gasoline and distillate demand. Gasoline demand will be tied to the U.S. economy moving closer to normal and people returning to work. Distillate demand will be driven by an uptick in jet fuel consumption as more people start flying again.

“We see gasoline demand coming in close to 7% year-on-year lower through Q3, with gasoil/diesel registering a decline of some 4%, implying a continued slowdown of the recovery, with a global return to 2019 levels this year increasingly in doubt,” JBC Energy said.

Today’s U.S. Energy Information Administration weekly inventories report will be released at 14:30 GMT. It is expected to show a small drawdown in crude oil stockpiles, but could surprise like the API numbers. A big draw in gasoline inventories could trigger another spike to the upside.

Look for a bullish tone as long as the December WTI futures contract can hold above $41.72. The next major upside target is $46.37. The faster the economy can recover from the impact of COVID-19, the quicker we will get there.

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