By Barani Krishnan
Investing.com -- For all practical purposes, the U.S. driving season is almost over. What’s going to drive the longs in oil after this?
The answer seems to be exports, exports and exports - of U.S. crude and oil products, that is. But who stands to gain most from these exports? The U.S. oil industry? Or OPEC? How will it all end? It really depends which narrative you’re following.
If it’s that of oil bulls or critics of the Biden administration, the story is that Asia is buying up lots of cheap barrels of U.S. crude because of the administration’s release of daily supply from the Strategic Petroleum Reserve, or SPR.
The reason for U.S. crude seeing so much demand from Asia is because of its $5 per-barrel or more discount against London’s Brent, the global benchmark, according to this narrative. It contends that such a discount wouldn’t be there if not for the release of the SPR crude.
This is a brazen claim, bordering on mistruth. Since it usurped WTI in 2010 to become the global benchmark, Brent has almost always held a premium against U.S. crude - though very briefly the two have been at parity, with Brent even being at a discount. By and large, a $5 variance is common between the two oils (this week it reached $7). But to pin it entirely on the SPR release is bunkum.
The bull narrative continues that with the Biden administration releasing a record amount of oil from the SPR, the Saudis who run OPEC, or the Organization of the Petroleum Exporting Countries, want the United States to further drain its inventory of emergency oil so that they will have greater control over global oil prices once the U.S. balance reaches “real emergency” level.
Instead of signaling to the market that they would give in to Biden’s wish to raise production, the Saudis are laying the groundwork for a future production cut because they are predicting that the global oil supply situation will flip from a deficit to a surplus giving them the justification for a future oil production cut. OPEC forecasts it can reduce the amount of crude it will need to supply in the third quarter by 1.24 million barrels a day to 28.27 million.
The rest of the story continues like this: The Saudis, with the help of their favorite co-conspirator Russia (read: Vladimir Putin) within the broader OPEC+ alliance, will have more control over energy prices and food prices, and inflation in general. It will also make the United States more vulnerable economically as well as from a national security standpoint.
The SPR releases are going to be ending in October, and when winter demand for oil kicks up, the United States will be even more strapped.
The U.S. oil numbers so far aren’t comforting, with broad crude supply 5% below the five-year average; SPR inventory being at 1985 lows; distillate stockpiles standing at 24% below the five-year average and gasoline supply about 6% below the five-year average.
Good so far? Now, for the bear narrative.
As we said at the outset, the U.S. driving season is almost over. Demand for fuels is expected to see consistent declines from here as American parents cart their children back to school and college over the next two weeks to meet the new academic year beginning September. Road trips for pure fun are the last things on their minds at this time.
U.S. gasoline stockpiles did see a staggering tumble of five million barrels last week. But weekly crude inventories went up by almost 10 million over the past two weeks.
U.S. crude exports hit a seven-month bottom last week, falling to an unbelievably low 2.11 million barrels daily - a nadir not seen since the 1.96 million barrels shipped during the week ended January 7.
To somewhat balance out the impact of the slump in crude exports, shipments of U.S. gasoline surged to 1.13 million barrels per day last week, the most since December 2018.
“With weekly oil balances delivering one bearish jolt after another of late, no thanks to questionable demand at home, the one solid thing the market has depended on are crude exports, which have steadily averaged 3 million to 4 million barrels a week for months now,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. “Thus, longs in the market should be pretty worried if we start getting more anemic crude exports like last week.”
Last week’s tumble in crude exports “was probably an aberration”, said Kilduff, who noted that the spike in gasoline exports came in handy as relief, “though there’s no guarantee that it’ll happen that way, week after week.”
While the bulls have made much of the 180 million barrels - or one million barrels per day - targeted to come off the SPR reserve each day between May and October, U.S. oil production itself is rising.
U.S. crude output in the Permian basin in Texas and in New Mexico, the biggest shale oil basin, is due to rise by a cumulative 78,000 barrels daily to a record 5.445 million bpd in August, the Energy Information Administration said in its productivity report on July 18.
The EIA said producers drilled 938 wells, the most since March 2020, and completed 964, the most since October 2021, in the biggest shale basins in June.
That left total drilled but uncompleted (DUC) wells down 26 to 4,245, the lowest since at least December 2013, according to EIA data going back that far. The number of DUCs available has fallen for 24 consecutive months.
It’s not just U.S. supply that’s rising. A wall of oil has also hit the international market over the past month.
OPEC oil output rose in July to its highest since April 2020, a Reuters survey found, as the group further eased production curbs under a pact with its allies and top exporter Saudi Arabia phased out a voluntary supply cut.
OPEC has pumped 26.72 million barrels per day (bpd), the survey found, up 610,000 bpd from June's revised estimate. OPEC output has risen every month since June 2020 apart from in February.
Domestic demand for gasoline has been spotty in the United States in recent weeks. While last week’s near five-million barrel drawdown in U.S. gasoline stockpiles would have delighted longs in the market, there have been multi-million barrel builds as well in prior weeks, as record high pump prices of above $5 per gallon shredded demand.
While the average pump price of gasoline had fallen to $3.99 a gallon by Thursday - its first time below $4 in months - U.S. crude itself could return to $100 per barrel after last week’s selloff that took it to below $90.
An upward swing in the crude price could feed into the pump price and weigh on demand again - particularly at a time when the peak U.S. summer driving season is ending. Given this dynamic, oil bulls might have to think when pushing crude prices up.
The bear narrative also contends that usually by this time of the year, the threat of hurricanes in the U.S. Gulf Coast of Mexico would be near and real, threatening production and other activity on energy platforms there.
This year so far, a disorganized tropical disturbance, called Invest 97L, crossed the tropical Atlantic this week without making any real impact. It’s still early in the day for the hurricane season, although the preliminary signs for 2022 have barely stirred fear.
Last year’s Hurricane Ida, which struck in September, shuttered more than 25% of natural gas production and nearly 17% of oil output in the United States.
Gelber & Associates, a Houston-based energy consultancy, said if a hurricane does develop in the Gulf of Mexico and threatens operations of coastal energy facilities there, it could have a major impact on production. But it adds:
“In the tropics, overall action is still rather quiet, with some activity starting to percolate with a handful of disturbances in the cue [sic]. At this point in time, there is nothing that could be construed as a meaningful concern.”
The market is also split between contrasting demand views from OPEC - which many think is deliberately forecasting lower demand in order to cut production - and the International Energy Agency, which forecasts higher demand but a weaker global economy.
"We are seeing an economic slowdown, but it's unclear if it's as big a slowdown as some of the recent outlooks have been predicting," said Ole Hansen, head of commodity strategy at Saxo Bank. "The demand will ebb and flow, but supply is still the main concern."
Add to these on-off-and-on-again Covid clampdowns in China, the resumption of production in Libya, continued sales of Russian oil despite sanctions, and the bear narrative could be as compelling as that of the bulls.
Oil: Market Settlements and Activity
West Texas Intermediate, the benchmark for U.S. crude, did a final trade of $91.88 after settling the session down $2.25, or 2.3%, at $92 per barrel. WTI earlier hit a session peak of $94.81.
For the week though, WTI was up 3.4%, offsetting some of last week’s 10% drop.
Brent, the London-traded global benchmark for crude, did a final trade of $98.01, after settling the official session down $1.45, or 1.5%, at $98.15, after an intraday high at $100.08.
Brent gained 3.4% on the week, after last week’s 14% tumble.
Oil: WTI Technical Outlook
“As long as WTI sustains above $88.43, traders will look for a retest of 200-Day Simple Moving Average of $95.46 and 50% Fibonacci level $96.47,” said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
“Above this level, expect a further up move towards the 50 Day Exponential Moving Average of $99.90.”
But Dixit also cautions that the market could flip towards the bearish side.
“Rejection from the 200-Day SMA of $95.46 and the 50-Day EMA $99.90 will resume the market’s weakness and push prices down to retest support areas of $88 and $87. The slide could extend to the monthly middle Bollinger Band of $81, before dropping to the 78.6% Fibonacci level of $77.”
Gold: Market Settlements and Activity
At Friday’s settlement, both futures of gold on New York’s Comex and the spot price of bullion were back in the $1,800 zone, finishing up for a fourth straight week.
Comex’s benchmark gold futures contract, December, did a final trade of $1,818.40 an ounce, after officially settling at $1,815.50, up $8.30, or 0.5%, on the day. For the week, it rose almost 1.5%.
The spot price of bullion, more closely followed than futures by some traders, settled at $1,803.64, up $14.10, or 0.8%.
Both Comex gold and the spot price have gained more than 5% over the past four weeks.
“This will be an interesting test for gold as $1,800 could represent an interesting rotation point from a technical perspective if there is no desire to see it above here but ultimately the case for bullish gold remains quite compelling,” said Craig Erlam, analyst at online trading platform OANDA.
“The fact that it continues to hold onto the bulk of the gains without any significant correction may suggest there's still an appetite for it, with slower tightening seen as a favorable outcome,” Erlam added.
Gold’s gains came after the dollar - which is a contrarian trade to the yellow metal - weakened this week on ebbing U.S. inflation data.
The Consumer Price Index, one of the most universally-followed gauges on inflation, showed zero growth in the United States for July after a 1.3% rise in June. Over the year to last month, the so-called CPI also slowed, expanding by 8.5% from a previous 9.1%.
The U.S. Producer Price Index, meanwhile, fell 0.5% in July, reinforcing the theme of inflation in retreat from four-decade highs.
The dollar fell this week despite various Fed officials saying the slowdown in July inflation won’t be enough to make them go easy with rate hikes.
Gold: Price Outlook
Gold needs to break above the previous month's high of $1814.36 for a momentum boost towards the confluence zone of the 50-Week EMA of $1827 and the 100-Week SMA of $1828, said Dixit of SKCharting.
This should be followed by the 78.6% Fibonacci level of $1835 and the weekly middle Bollinger Band of $1838, added Dixit, who makes his calls based on the spot price of gold.
The daily stochastics reading of 93/86 makes for a renewed positive overlap above the overbought area of spot gold, while the weekly stochastics reading of 59/44 continues with strong positivity, Dixit said.
“Swing traders will look to buying the dips towards the support zone of $1,785-$1,775, and aim for $1,828-$1,838.”
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.