Positive Momentum Is Accelerating For Oil
In our weekly US crude storage report, we said that the market will likely overlook the crude build if product demand is strong. This turned out to be correct with WTI now trading above $84/bbl.
For those of you that follow technicals closely, WTI needs to break above $85.60 for us to confirm a breakout of the downtrend (over the past year), if so, resistance won't come in until the $90s.
Looking at the US weekly oil data, positive momentum is starting to gain traction from all sides of the corners. First, US oil demand rebounded strongly with gasoline demand leading the way.
Implied US oil demand on a 4-week average basis is now above 2021. We have also seen improvement in distillate demand over the past few weeks, which should calm fears about the slowdown in manufacturing dampening oil demand.
Other oil, which has outperformed since late last year, continues to surge higher pushing total oil demand higher. Jet fuel demand is also a bright spot this year with demand now moving ever closer to 2019.
Looking ahead, we expect to see a small crude draw starting next week. Crude exports are rebounding, but crude imports remain elevated, which has dampened the size of the draw.
However, looking at the incoming crude exports and imports, we see hefty draws for the remainder of August. Couple this with additional SPR builds and we could easily see a scenario where US commercial crude storage drops to a 5-year low.
Given that the market is forward-looking, oil prices will trade higher well in advance of the data coming out. Looking at WTI timespreads, the price action appears to confirm our forecast.
WTI 1-2
If we are right about the crude draw, then we should see WTI break above $85.60 in short order.
But it's not just the positive momentum we are seeing on the US side. Looking at global data from Brent timespreads to onshore crude inventory changes, all the signs are pointing to a healthier and stronger oil market.
Brent 1-2
Positive Momentum
For the first time this year, things are looking stronger for the oil market. Validation from both the demand data and the physical oil market gives us comfort that this rally is sustainable. The Saudi and Russian voluntary cuts will go a long way in further tightening the market, and if demand continues as is, oil inventories will draw, and prices will move even higher.
Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.