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James Hyerczyk
WTI and Brent Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed higher last week in a mostly supply-driven rally, however, worries that the surge in COVID-19 cases would hurt demand for fuels and possibly curtail the economic recovery, helped limit gains.

Unexpected drawdowns in crude inventory as reported by the American Petroleum Institute (API) and the U.S. Energy Information Administration (EIA) were the catalysts behind the rally, gains were likely capped as both the API and EIA reported jumps in gasoline and distillate inventories with the latter hitting  record high according to the government.

Last week, September WTI crude oil settled at $41.22, up $0.79 or +1.95% and December Brent crude oil finished at $45.11, up $0.80 or +1.77%.

Meanwhile, both the International Monetary Fund (IMF) and International Energy Agency (IEA) issued bearish outlooks for demand.

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.


US Energy Information Administration Weekly Inventories Report

The EIA reported on Wednesday that U.S. crude oil inventories fell 7.4 million barrels during the week-ending July 31. Analysts had expected an inventory decline of 3.267 million barrels for the week.

The EIA also reported an increase in gasoline inventories of 419,000 barrels, after a 700,000-barrel build estimated the previous week. Distillate fuels inventory increased 1.6 million barrels for the week to July 31. That compared with a build of half a million barrels a week earlier.

Gasoline production last week averaged 9.3 million bpd, compared with 9.2 million bpd a week earlier. Production of distillates last week averaged 4.9 million bpd, compared with 4.8 million bpd a week earlier.

Demand Outlook Bleak

The International Energy Agency (IEA) updated its oil demand forecast and now expects demand to suffer a 7.9-million-bpd decline this year. This compares with expectations of an 8.9-million-bpd demand contraction by OPEC.

Earlier in the week, the International Monetary Fund (IMF) said it expected crude oil demand to record an 8-percent decline this year. As a result, prices will be 41 percent lower than they were last year on average, the IMF said in a report titled ‘Global Imbalances and the COVID-19 Crisis’.

Weekly Forecast

A slow and steady rally, or a rangebound trade with an upside bias? You can probably describe the current rallies in WTI and Brent as both. Despite the bearish outlook for demand, traders are continuing to bet that a gradual recovery in the global economy will eventually overcome these issues. It’s part of the “buy everything” campaign going on. With so much cash floating around in the system and the dollar sitting near two-year lows, speculators are looking at relatively cheap prices and seem willing to hold onto crude oil until the economy turns around.

Although demand is expected to be soft, traders have maintained a steady “buy the dip” mentality so even if prices do weaken, there seems to always be someone there to buy the break. At this time, I see no reason why this type of trade won’t continue over the next week.

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