Oil Pulls Back After The Major Rally
Oil Video 06.05.20.
Oil Inventories Continue To Grow
Initially, oil ignored yesterday’s API Crude Oil Stock Change report which showed that crude oil inventories have increased by 8.44 million barrels but later found itself under pressure as traders decided to take some profits off the table after a major rally.
The EIA Weekly Petroleum Status Report has just been released, and it showed that crude oil inventories have increased by 4.6 million barrels, while gasoline inventories declined by 3.2 million barrels and distillate fuel inventories grew by 9.5 million barrels.
The most watched number – crude oil inventories – was better than expected and caused a temporary spike in the price of oil, but the increase in distillate fuel inventories clearly shows that the market is not out of the woods yet.
There are some improvements on the production side as domestic oil production declined from 12.1 million barrels per day (bpd) in the previous week to 11.9 million bpd.
A steady decline in the domestic oil production is required to improve the supply/demand balance as it is hard to expect that demand will increase so fast that no additional production cuts will be necessary.
At this point, the domestic oil production continues to decline naturally as oil producers get rid of their uneconomic production. Given the current oil prices, this trend is set to continue.
How Long Will The Rally Last?
The front-month June 2020 contract for WTI had a major rally from recent lows as traders believed that the situation with oil storage was not as dire as previously feared.
In essence, the front-month contract was closing the spread with longer-dated contracts. However, the December 2020 contract indicates that additional upside may be hard to achieve in the near term as it stays not far from the $30 level.
This means that the market is still cautious about the prospects of the demand recovery. In addition, the market will face a problem of an inventory overhang even the when the supply/demand balance situation improves.
The current correction is normal from a technical point of view since the front-month contract had a major rally from lows without any meaningful pullbacks. However, it remains to be seen whether the next week’s data on oil production and inventories will allow the rally to continue.