Crude oil price continued rallying as the market remained hopeful that demand is rising. The price also reacted to news that Saudi Arabia had removed its discounts for oil shipped in Europe. However, a closer look at the situation shows that the market may be understating crucial details.
US inventories are falling but production is actually rising
The headline number released by the Energy Information Administration (EIA) showed that crude oil inventories in the previous week rose by more than 4 million barrels. This was a good number since it was the lowest since March. Another data released by Baker Hughes last Friday showed that US drillers had exited more wells.
However, a closer look at the report showed that US production is actually increasing. The report said that crude oil refinery inputs averaged 13.0 million barrels in the previous week. This was 216k barrels per day from the previous week. At the same time, these refineries were operating at about 70.5% capacity.
Another data showed that US was actually importing more oil last week. It imported 5.7 million barrels per day, which was higher than the previous week’s 5.4 million barrels.
This activity is happening at a time when activity in the US is falling as evidenced by the recent manufacturing and services PMI data. Also, considering that more than 33 million Americans are out of work, it means that demand – at least in the US – will take a longer period before normalizing.
Global flight industry will take time
The rally of crude oil price also ignores a fact that while many countries are reopening, the fact is that global airline travel will take time to recover. For example, while New Zealand has seen its cases fall, it is impossible for the country to allow flights from countries like the United States and Europe where infection rate is surging.
Therefore, while more people will start using their cars, they are just a fraction of the entire crude oil market.
Shale drillers returning
As I wrote recently, many troubled shale drillers have started talking about returning to the oil market. These companies include Diamondback, which is facing bankruptcy and others like Chesapeake and Parsley Energy. As these companies come back, oil supply will increase at a time when demand is still challenging.
Looking at the daily chart, we see that crude oil price has been on a strong rally since last week. Also, we see that the price has found significant resistance slightly above the 38.2% Fibonacci retracement level and the 50-day EMA. Therefore, this means that bulls will need to defend and move past this level to justify the overall trend. While a move to the 50% retracement level at $32 is possible, it is possible that the price may move to retest the important support of 20.00.