(Bloomberg) — Oil jumped the most since June alongside a rally in broader equities markets, boosted by expectations of U.S. crude stockpiles extending their streak of declines.
Futures in New York surged 3.5% Wednesday, though still fell short of recouping all the losses from the previous session’s settle at a three-month low. Moving in tandem with stronger equities, Brent regained its technical footing, sharply rising above the 100-day moving average. The 14-day Relative Strength Index for futures in London and New York was below 30 on Tuesday for the first time since April, signaling the two benchmarks were oversold.
Oil is recovering from an oversell yesterday, said Gary Cunningham, director of market research at Tradition Energy. The rebound in equities signals “the economy isn’t in as bad a shape as thought,” he said. Additionally, the market expects a strong decline in crude stockpile. “So that’s also helping us recover from some of the losses yesterday.”
American crude stockpiles are expected to have declined last week for a seventh week in a row. The industry-funded American Petroleum Institute will release its storage numbers later on Wednesday ahead of a U.S. government report. Meanwhile, EOG Resources Inc., America’s biggest independent shale oil producer, forecast a tighter supply picture, saying U.S. oil will likely suffer years of declines and may never regain the peak achieved earlier this year.
“U.S. oil production is going to be under a lot of pressure for the foreseeable future because a lot of these companies have gone bankrupt, they’ve been under financial duress for a while now,” said Josh Graves, senior market strategist at RJ O’Brien & Associates LLC. “That’s going to take away from the supply side. But is it going to be enough to outweigh the lack of demand? That’s a question that is yet to be answered.”
- Brent for November settlement rose $1.01 to end the session at $40.79 a barrel
- West Texas Intermediate for October delivery added $1.29 to settle at $38.05 a barrel
In physical markets, Bakken crude for delivery at Clearbrook, Minnesota, rose to its narrowest discount to WTI futures in roughly a week. On the Gulf Coast, Light Louisiana Sweet crude is trading at its widest premium since late August.
Still, futures are heading lower for the week, and there are concerns oil’s break below its recent trading range could resume toward the downside. Faltering demand recovery in parts of the world and the onset of refinery maintenance season is weighing on the outlook for consumption already devastated by the pandemic. Meanwhile, in the latest signal of a gloomy outlook for U.S. oil production and weaker demand, Enterprise Products Partners LP canceled the expansion of its 450,000 barrel a day Midland-to-Echo crude oil pipeline system that connects the Permian Basin with the Gulf Coast.
The picture doesn’t look much better on the refining side. Refinery utilization may stay around 75% of capacity until early 2021, if refineries have to clear the ongoing surplus in oil products inventories, Citigroup Inc. analysts wrote in a report. That’s as refining margins continue to be dismal, with the crack in the U.S. for combined gasoline and diesel below $10 a barrel at its lowest seasonal level in nearly 10 years.
“This is really a demand concern now, and that’s what’s going to lead into the end of the year” amid uncertainty over a vaccine and a potential return of lockdown restrictions due to the pandemic, said Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors LLC. “Sure, you can inch up a little bit higher here again, but I think the risk is downward.”
Other oil-market news
- Saudi Aramco, the world’s biggest oil company, is getting squeezed by its main shareholder, the Saudi Arabian government.
- A key oil product used to make motor fuel and the building blocks for plastics such as water bottles is facing a growing glut in Asia, with the slump in airline travel exacerbating the surplus.
- While short-term oil market fundamentals look soft, there could be improvement next year, Morgan Stanley analysts wrote in a note.
–With assistance from James Thornhill and Ann Koh.
© 2020 Bloomberg L.P.