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James Hyerczyk
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WTI and Brent Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed nearly 5% higher last week, boosted by bullish expectations for demand as the global economy reopens, confidence in OPEC+’s ability to balance supply and stabilize prices and the lack of progress in U.S. – Iran nuclear negotiations. Conditions could change this week, however, with the U.S. and Iran scheduled to return to the negotiations table.

Last week, July WTI crude oil settled at $69.62, up $3.30 or +4.98% and August Brent crude oil finished at $71.89, up $3.17 or +4.41%.

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Bullish Factors

The consensus among market forecasters, including the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, is that oil demand will exceed supply in the second half of 2021, which has spurred the recent run in prices.

OPEC+ data shows that by the end of the year oil demand will be 99.8 million barrels per day (bpd) versus supply of 97.5 million bpd.

The American Petroleum Institute (API) on Wednesday reported a draw in crude oil inventories of 5.36-million barrels for the week-ending May 28. Analysts had predicted a draw of 2.114-million barrels for the week.

U.S. crude inventories fell more than expected last week the Energy Information Administration said on Thursday. Crude inventories fell by 5.1 million barrels in the week ended May 28, compared with analysts’ expectations for a decrease of 2.4 million barrels.

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Potentially Bearish Factors

There are three factors that could help put in a short-term top:  Another build in gasoline stocks, renewed concerns over the pace of global vaccinations and a surprise deal between the U.S. and Iran.

All will be looked upon as short-term events, but initially, the news will give traders an excuse to book profits and lighten up long positions.

The API reported a build in gasoline inventories of 2.51-million barrels for the week-ending May 28 – compared to the previous week’s 1.986-million-barrel draw. Analysts had expected a 1.385-million-barrel draw for the week.

Fuel stocks rose in a pre-holiday rebound from drawdowns that occurred during the Colonial Pipeline outage, the Energy Information Administration said on Thursday. Gasoline stocks rose by 1.5 million barrels, contrary to expectations for a 1.5 million-barrel drop. Gasoline product supplied, a measure of demand, fell 3.5% to 9.1 million barrels per day.

Weekly Outlook

The U.S. and Iran are expected to open up negotiations this week. That news may be enough to limit gains, while the announcement of an actual deal could be bearish over the short-run.

A consensus of traders agree that by the time Iran is able to rev-up its production, demand will have increased enough to offset the extra supply. Furthermore, OPEC+ is likely to make adjustments to its production schedule to offset the increased Iranian supply. Increased Iranian oil production could bring as much as 500,000 to 1 million barrels of oil per day to the market once sanctions are lifted.

Furthermore, in the United States, the number of oil rigs operating fell for the first time in six weeks. This indicates that U.S. drillers are cutting back on production, which helps reduce the risk of a supply glut in the global oil market later this year.

In conclusion, the threat of more supply from Iran could initially drive prices lower, but since the extra supply is likely to be absorbed by more demand, the weakness is likely to be short-lived.

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