How Surging Demand Could Kickstart the Recent Stalled Oil Rally
By: Bart Melek
Aug. 18, 2023 - 2 minutes
Despite a record drop in inventories, crude oil gave up a good portion of its recent outsized gains as a spike in interest rates again ignited macro gloom. Notwithstanding a recent correction, WTI and Brent crudes are still 13.2% and 15.6% respectively above lows recorded back in late June due to a significantly improved fundamental outlook. Despite a significant focus by the market on lower-risk investments, there could be more room to grow in the latter part of the year.
Markets are largely ignoring the U.S. Department of Energy (DOE) report showing a 17.05 million-barrel drop in U.S. crude stockpiles — bringing the total to just 439.8 million barrels — which is one percent below the five-year average for this time of the year. Traders also appear to be looking past the fact that petroleum product stockpiles are materially below their normal levels and the strong future refinery crude intake this implies to produce sufficient fuel. Macro worries and a large deterioration in risk appetite have also negated the DOE's relatively recent and substantial U.S. demand upgrades, Russian supply declines and the likelihood that key producers and Saudi Arabia will extend existing production reduction at the upcoming OPEC+ gathering.
Given the robustness and length of the recent rally, crude oil prices may drop. After all, the commodity still faces significant recession risks in the Western world amid the U.S. Treasury plans to flood the market with government-debt issuance, signs of the labor market’s persistent strength and a weak China. Additionally, a sharp weakening of risk appetite and higher carry costs associated with a rate spike tend to prompt traders to take profits.
However, we continue to be bullish on oil after the recent gains consolidate. Pending stimulus in China and the ongoing post-COVID normalization, stronger-than-expected demand in the U.S. points to demand surging by over 2 million b/d this year. Furthermore, ongoing OPEC+ production reductions, likely including a 500,000 b/d reduction from Russia, also suggests this market should tighten as the year unfolds. Indeed, these realities should generate a deficit in both Q3 and Q4 that could more than offset the surplus accumulated in the first half of 2023 and tighten markets. With that and significantly elevated crack spreads amid a low inventory environment and recent major refinery outages, crude might perform very well.
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Global Head of Commodity Markets Strategy, TD Securities
Global Head of Commodity Markets Strategy, TD Securities
Global Head of Commodity Markets Strategy, TD Securities
