Is This The End Of The Big Stimulus Rally?

U.S. West Texas Intermediate crude oil futures are trading lower on Friday, putting the market in a position to close lower for the first week in three. The market has been trading inside a narrow range for two straight weeks.

Crude is likely being propped up by consecutive weekly inventory drawdowns, but gains have been limited by demand concerns in the wake of the Fed’s gloomy outlook for the economy and OPEC’s dismal prediction for demand.

This week’s biggest influences on the price action were the government’s weekly inventory report and comments from major producers regarding adherence to the OPEC+ production cuts and future demand. The Fed said that the economic recovery would be rocky, but that prediction has been priced into the market for several months.

US Energy Information Administration Weekly Inventories Report

U.S. crude oil stockpiles fell last week even as net imports jumped sharply, while fuel demand dipped as well, the EIA said on Wednesday.

Crude inventories fell by 1.6 million barrels in the week to August 14 to 512.5 million barrels, less than analysts’ expectations in a Reuters poll for a 2.7 million-barrel drop.

Net U.S. crude imports rose by 1.1 million barrels per day to 3.6 million bpd, the EIA said.

Fuel demand dropped by more than 2 million bpd to 17.2 million bpd in terms of product supplied. Overall fuel demand is down 14% from the year-ago period over the last four weeks.

Refinery runs fell by 171,000 bpd in the last week, the EIA said, while refinery utilization rates fell by 0.1 percentage points.

U.S. gasoline stocks fell by 3.3 million barrels to 243.8 million barrels, the EIA said, compared with analysts’ expectations for a 1.1 million-barrel drop.

Distillate stockpiles, which include diesel and heating oil, rose by 152,000 barrels, versus expectations for a 557,000-barrel drop. Overall distillate stockpiles sit at 177.8 million barrels, just off a 38-year high set last month.

OPEC+ Enforcing Production Cut Agreement Rules

An internal report by the Organization of the Petroleum Exporting Countries and allies, showed the group known as OPEC+ was focused on ensuring that members who had overproduced against their commitments would cut their output, as flagged following an OPEC+ meeting on Wednesday, Reuters reported.

Reuters also said that OPEC+ found some members would need to slash output by 2.31 million barrels per day to make up for their recent oversupply.

Among OPEC members, Iraq and Nigeria were the least compliant and even the United Arab Emirates, which made additional voluntary cuts in June, overproduced by around 50,000 bpd over the May-July period.

The internal report also flagged demand risks, showing OPEC+ expects oil demand in 2020 to fall by 9.1 million bpd, 100,000 bpd more than in its previous forecast.

Finally, the OPEC+ panel said that if a prolonged second wave of infections hits China, India, Europe and the United States in the second half of the year, demand could fall by 11.2 million bpd in 2020.

Weekly Technical Analysis

Weekly October WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart. A trade through $43.68 will signal a resumption of the uptrend. The main trend will change to down on a move through $23.26.

The main range is $60.75 to $23.26. Its 50% to 61.80% retracement zone at $42.01 to $46.43 is the major resistance.

The short-term range is $23.26 to $43.68. If the main trend changes to down then its retracement zone at $33.47 to $31.06 will become the primary downside target. This should be considered a value zone so look for buyers to return on a test of this area.

Weekly Technical Forecast

Based on this week’s price action, the direction of the September WTI crude oil market is likely to be determined by trader reaction to the 50% level at $42.01.

Bullish Scenario

A sustained move over $42.01 will indicate the presence of buyers. This could lead to a quick test of the minor high at $43.68. Taking out this level could trigger an acceleration to the upside since the weekly chart indicates there is no resistance until $46.43.

Bearish Scenario

A sustained move under $42.01 will signal the presence of sellers. The first downside target is a minor bottom at $39.00. Taking out this level could trigger a further decline into $33.47 over the near-term.

Short-Term Outlook

It’s hard to get bullish with the Fed weighing in on the economy with another dire warning. The Fed minutes, released on Wednesday, sounded pretty gloomy about the U.S. economy.

Officials at the meeting “agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term,” the meeting summary said.

Meanwhile, although Saudi Energy Minister Prince Abdulaziz bin Salman said global oil demand should recover to pre-pandemic levels as soon as the fourth quarter as long as OPEC+ partners continue to comply with a deal to cut output, however, Reuters said that a second draft of the statement showed a second extended wave of the pandemic posed a major risk for the oil market recovery.

Clearly, OPEC+ believes their production cut agreement is helping to stabilize oil prices and that may very well be true since we’ve seen prices appreciate since it was initially implemented. However, policymakers believe they could do better, but need cooperation from non-compliant members to toe the line to bring the supply/demand closer to equilibrium.

Full compliance is likely to continue to underpin the markets, but the poor demand situation is likely to limit gains. Therefore, we continue to expect a most rangebound trade until demand issues improve, particularly for gasoline and jet fuel. However, we may not see any substantial increase in demand for fuels until the number of global COVID-19 cases begins to flatten out, or a successful vaccine is developed. Additionally, the U.S. needs another stimulus deal and fast, or the momentum created by the first stimulus package will vanish.