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James Hyerczyk
WTI and Brent Crude Oil

U.S. West Texas Intermediate an international-benchmark Brent crude oil futures finished sharply lower last week as weak longs finally threw in the towel after propping up the market the last four weeks, hoping for a surge in demand.

Two stories dominated the price action – an unexpected Saudi price cut and rise in U.S. inventories – but there were also other factors contributing to the weakness.

Last week, December WTI crude oil settled at $38.08, down $2.51 or -6.18% and December Brent crude oil finished at $40.43, down $2.75 or -6.80%.

Compounding the weakness was a second consecutive weekly decline in U.S. stock indexes as well as U.S. economic indicators that suggested a long and difficult recovery from the coronavirus pandemic.

Additionally, further dampening the markets mood, the U.S. Senate killed a Republican bill that would have provided around $300 billion in new coronavirus aid. In another bearish sign, traders were starting to book tankers again to store crude oil and diesel, amid a stalled economic recovery at the COVID-19 pandemic continues.

Saudi Arabia Unexpectedly Cuts Prices to Asia

The world’s top oil exporter Saudi Arabia cut the October official selling price for Arab Light crude it sells to Asia by the biggest margin since May. Asia is Saudi Arabia’s largest market by region.

The price cut, scheduled for October shipments, is likely a sign that the world’s biggest exporter may see fuel demand wavering amid flare-ups in the coronavirus.

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US Government Reports Surprise Inventories Build

U.S. government data revealed a weekly rise in U.S. crude inventories, on the heels of six consecutive weeks of declines, raising expectations of an oversupplied market as uncertainty continues to surround the outlook for demand.

The Energy Information Administration (EIA) reported that U.S. crude inventories rose by 2 million barrels for the week-ended September 4 – the first weekly increase in seven weeks. Traders were looking for a 3.1 million barrel decline.

Total U.S. crude inventories, excluding those in the Strategic Petroleum Reserve stood at 500.4 million barrels, about 14% above the five-year average for this time of year.

The EIA also reported a big drop of 1.1 million barrels per day in crude refinery runs for last week, leading to the first domestic crude-stock build in weeks. This was the result of refinery damage from Hurricane Laura.

Gasoline supply, meanwhile, fell by 3 million barrels, while distillate stockpiles declined by 1.7 million barrels. An S&P Global Platts survey had shown expectations for a supply decline of 2.5 million barrels for gasoline, but distillates were expected to rise by 300,000 barrels.

Additionally, the EIA data also showed crude stocks at the Cushing, Oklahoma, storage hub edged up by about 1.9 million barrels for the week, while total domestic oil production climbed by 300,000 barrels to 10 million barrels per day.

Weekly Forecast

Unless there is a wave of short-covering or profit-taking in the works, sellers should continue to dominate the trade this week. Early last week, it was demand worries driving the market lower, after the release of the EIA data, we can now add oversupply concerns to the growing list of bearish factors weighing on prices.

With the U.S. summer driving season coming to a close, Washington policymakers failing to pass stimulus legislation and COVID-19 cases still rising, it’s hard to tell where the demand will come from to turn the markets around unless prices hit a major value area.

We expect to see buyers resurface on a test of $34.82 to $32.58 (December WTI). This price range represents the best near-term value area.

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

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