Crude oil likely to recover further over time

After falling sharply for two consecutive weeks, oil prices have stormed back at the start of this week.

Following their strong recovery from historically low levels that were hit at the height of the pandemic, oil prices started falling back a couple of weeks ago. Signs of weakness in demand recovery due to the pandemic and a dip in OPEC+ oil cut compliance were among the reasons behind that slide. Concerns were raised on the supply front after data showed the United Arab Emirates regularly exceeded its quota in July.  On the demand front, the International Energy Agency warned a day earlier that the outlook for oil market is “even more fragile” due to a resurgence of the coronavirus. In addition, the OPEC published a weak crude demand forecast, a view also shared by BP and Trafigura Group, among others.

However, demand concerns have since been lifted a little, owing to improvement in Chines data, the second largest economy and oil consumer in the world. Retail sales rose in August for the first time this year, while industrial production expanded by 5.6% y/y from 4.8% the previous month, beating expectations and boosting investor appetite for crude and other industrial materials such as copper and silver.

Meanwhile, US crude oil inventories have been falling consistently since July, raising hopes the surplus supply is slowly being reduced. That said, there was an unexpected build reported in the prior week. However, according to data from the American Petroleum Institute, which last night reported crude stockpiles declined by a massive 9.52 million barrels last week, that build seems to have been a temporary one. If the API is correct, today’s official inventories data from the US Energy Department should easily beat expectations calling for a 2.1 million build. A big drawdown in official data similar to the API figures should provide renewed support for oil prices.

And let’s not lose sight of the big picture: the OPEC+ group’s record cuts will be there for a long time to offset the impact of weakness in demand. As such, the downside for oil prices should be limited. As the global economy continues to recover from the pandemic, and demand rebounds, I think oil prices will rise over time. I expect Brent oil to surpass the post-lockdown high of $46.50 and head towards he low $60s in the coming months. Likewise, I reckon WTI will surpass its own post-lockdown high of just under $44 and reach for the $50-$55 range in the months ahead.

Has the motion towards those long-term levels started already remains to be seen, but the daily candles printed over the past two days do look rather constructive as far as the bulls are concerned.