Oil Price Fundamental Weekly Forecast – Weak Gasoline Demand Could Weigh on Prices

U.S. West Texas Intermediate and international-benchmark Brent crude oil finished slightly lower last week as traders digested a number of off-setting factors.

Bullish private industry and government inventories data helped underpin the markets, while the possibility of increased supply after OPEC+ announced it would begin tapering its production cuts starting in August weighed on prices. Meanwhile, traders were also monitoring the surge in COVID-19 cases that could lead to a mild case of demand destruction.

Last week, September WTI crude oil futures settled at $40.75, down $0.01 or -0.02% and September Brent crude oil finished at $43.14, down $0.10 or -0.23%.

American Petroleum Institute Weekly Inventories Report

The API reported late Tuesday a huge draw in crude oil inventories of 8.322 million barrels for the week-ending July 10. Analysts were looking for a smaller draw of 2.275 million barrels.

The API also reported a draw of 3.611 million barrels of gasoline for the week-ending July 10. Analysts forecast a 900,000-barrel draw for the week.

Distillate inventories were up by 3.03 million barrels for the week, while Cushing inventories saw a build of 548,000 barrels.

US Crude, Refined Products Stocks Drop Sharply:  EIA

U.S. crude oil and refined product inventories fell sharply last week due in part to a notable drop in crude imports, the Energy Information Administration said last Wednesday.

Crude inventories fell 7.5 million barrels in the week to July 10 to 531.7 million barrels, compared with analysts’ expectations in a Reuters poll for a 2.1 million-barrel drop. The decline was driven by a steep drop in imports, which fell by a net 2 million barrels per day (bpd), the EIA said.

U.S. imports of oil from Mexico returned to more typical levels at 490,000 bpd in the most recent week, after a surprising spike to an eight-year high in the previous period.

Gasoline demand, meanwhile, dipped modestly as more U.S. states have reimposed lockdowns as coronavirus cases and deaths are spiking anew. Overall, gasoline supplied over the last four weeks, a proxy for demand, is 9% below the same period a year ago.

Distillate stockpiles, which include diesel and heating oil, fell by 453,000 barrels. However, Gulf Coast distillate inventories rose last week to 58.6 million barrels, highest on record.

OPEC+ Agreed to Ease Record Supply Curbs from August

OPEC and its allies agreed on Wednesday to scale back oil production cuts from August as the global economy slowly recovers from the coronavirus pandemic.

OPEC+ has been reducing output since May by 9.7 million barrels per day, or 10% of global supply, but from August, cuts will officially taper to 7.7 million bpd until December.

Despite the official OPEC+ accord, Saudi Arabian Energy Minister Prince Abdulaziz bin Salman said production cuts in August and September would end up amounting to about 8.1 million-8.3million bpd, more than the headline number. That’s because countries in the grouping which over-produced earlier this year would compensate by making extra August-September cuts, the minister said.

Weekly Forecast

The OPEC+ move is risky because the rise in coronavirus infections in the United States and around the world could lead to a second round of demand destruction if the outbreak cannot be contained. However, some traders are downplaying the threat, citing tightening global inventories and a pick-up in the economy as reasons to remain optimistic.

The next major move in crude oil will be determined by whether we see more draws in the coming weeks. If the API and EIA reports continue to indicate a tightening of supplies then this may be enough to offset the potentially bearish tapering of the production cuts.

A tightening of supplies, however, will be largely determined by whether the economy continues to recover. Of major concern will be gasoline demand. If consumers decide voluntarily or are forced to shut down then this could weigh on fuel demand.

“The gasoline demand number is very weak, and with the coronavirus situation worsening, it’s only going to get worse. That’s going to be a weight on the market,” said John Kilduff, partner at Again Capital in New York.