The crude oil market is well into a significant, well-deserved correction, and the July peak just below $75 might be a major top until later in the year. In addition to the uptrend in the dollar, the energy markets are facing frequent evidence of a slower economy that is likely to translate into softer consumption.
Global oil supply is rising modestly, and the US crude oil inventory deficit to year ago levels has narrowed by more than 20% over the last month. The rise in global energy production has been led by the OPEC-plus agreement to bring back 400,000 barrels per day of idled production per month until the entire hold-back is eliminated. Even the US is showing signs of increasing production, with the most recent estimates putting output to 11.4 million barrels per day, the highest since May 2020. The US drilling rig count has doubled over the last year, which should add to US supply.
From the demand front, the Delta variant infection wave appears to have stymied the recovery of air travel, and after the upcoming holiday weekend, seasonal demand for gasoline and jet fuel is expected to moderate. After a record implied gasoline demand figure of 10.043 million barrels per day earlier this summer, weekly readings have not advanced, and we suspect they will taper off in September. There are also signs that Chinese demand is softening, with the trade anticipating a reduction in Chinese crude oil imports and refinery runs in September as well.
With a precipitous decline in October Crude Oil over the past two weeks and a moderately large spec and fund net long position, we anticipate additional, follow-through selling and a possible return to $60.00. The most recent spec and fund net long was still in the upper portion of the range of the past 25 months, and while the $6 price slide this week likely pulled that position lower, we believe more liquidation is possible. Declining open interest is another sign that long-held bulls have stepped aside. Until prices fall to a low enough level to bring in some bargain-hunting, we suggest selling rallies.
Originally Published on August 20, 2021
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