Crude Oil: Three Reasons The Odds Favor The Upside

 | Jul 27, 2020 10:25AM ET

  • Falling US production and rig count
  • The reaction to the tapering on July 15
  • The trend is always your friend, and it is higher

    • The new active-month September NYMEX crude oil futures fell to a low of $21.99 per barrel on April 22. Meanwhile, the expired May contract dropped below zero on April 20, reaching a record low of negative $40.32 per barrel. The lack of storage caused landlocked crude oil to become a bearish hot potato, as those holding long positions had nowhere to house their inventories.

    Since then, the price has made an impressive comeback. September futures rose to a high of $42.51 per barrel on June 23 and has been consolidating around the $40 level. The price action filled the gap on the chart from March at $42.49 per barrel. Voids on charts tend to act as magnets for price action.

    The crude oil price recovered by over $20 per barrel from the April low on the September futures contract. On the continuous contract, it rebounded by over $80 per barrel. As crude oil has been consolidating near the high since June, the price could be preparing for a move to even higher highs.

    h2 Falling US Production And Rig Count/h2
     
    Even though there was an uptick in daily US output over the past week to 11.1 million barrels per day, production is still over 15% lower than in March when it peaked at 13.1 mbpd. Last week, inventories in the US rose as the EIA reported an increase of 4.9 million barrels, and the API said they rose by 7.544 million barrels. Product stockpiles were mostly lower for the week ending on July 17.

    Baker Hughes said that the number of rigs operating in the US stood at 181 for the week ending on July 24 compared to 776 last year. When it comes to production around the world, OPEC, Russia, and other world producers will operate under a 7.7 million barrel per day production cut in August, down around two million from July, but a significant amount as global business activity continues to get back on track.

    h2 The Reaction To The Tapering/h2

    The first sign of strength in the oil market came after OPEC, Russia, and other world producers tapered the output cut to under eight million barrels per day. Crude oil held the $40 per barrel level on both nearby WTI and Brent futures.

    Chinese demand for crude oil has been robust over the past months. At the same time, the decline in the value of the US dollar, the currency in which crude oil is always priced, provides some support.

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