Oil up $4, Shrugging off Recession Talk and 2-Month Highs in Crude Stocks

© Reuters.

By Barani Krishnan

AiVIF.com -- In an oil market that’s constantly screaming undersupply, it’s probably hard to keep the bull suppressed for too long — even when there’s a two-month high in crude stocks.

Crude prices jumped some $4 a barrel, or about 4%, on Thursday, rebounding from the near $15, or 15%, loss in two previous sessions.

The recovery came amid widespread belief the market had been oversold on recession fears and demand concerns, particularly in a sector operating on the notion that it will stay undersupplied in the near future — regardless of economic or demand downturns.

“This perhaps highlights the disconnect between the speculative market on the futures exchanges, and the reality of the physical market where futures contracts remain heavily in backwardation, signaling immediate oil supplies are as tight as ever,” said Jeffrey Halley, who oversees Asia Pacific research for OANDA.

Backwardation refers to higher pricing for oil meant for prompt delivery versus that which is stored for later sales. It is the backbone of the bull market in oil and has been in force since crude’s price recovery from the demand destruction caused by the 2020 coronavirus outbreak. This year’s oil rally from the sanctions imposed on major energy exporter Russia for its invasion of Ukraine has also put market bulls in a near unassailable position for the most part.

In Thursday’s trade, New York-traded West Texas Intermediate, or WTI, crude settled at $102.73 a barrel, up $4.20, or 4.3%, on the day. The U.S. crude benchmark fell to a near three-month low of $95.10 on Wednesday.

London-traded Brent, the global benchmark for crude, settled at $104.65 a barrel, up $3.96, 3.9%, on the day. Brent also hit a near three-month low in the previous session, sliding to a bottom of $98.52.

The rebound came despite U.S. crude inventories hitting two-month highs last week, according to data from the Energy Information Administration, or EIA, that suggested an uptick in supply as domestic oil producers put more drilling rigs into action.

Crude stockpiles stood at 8.235 million barrels in the week that ended July 1, the EIA said in its Weekly Petroleum Status Report. Historical data showed that to be the highest build for US crude since the week ended May 6, when inventories stood at 8.487 million barrels. Analysts had forecast a 1.04-million barrel drop instead for crude last week.

“It’s definitely a sign of the higher availability of supply although production itself did not go up on the week,” energy markets commentator John Kilduff said, referring to production that remained static at 12.1 million barrels per day.

The EIA also balanced out the higher crude stockpile numbers with drawdowns of 2.5 million barrels in gasoline inventories and 1.3 million in distillate balances for last week. Gasoline is the number one automobile fuel in the United States while distillates are used for turning out the diesel for trucks, buses, trains and ships and the jet fuel for airplanes.

Analysts had projected a 0.48-million-barrel decline for gasoline and 1.13-milion-barrel build for distillates last week.

“I remain unconvinced that the fall in prices is anything more than an adjustment to recessionary fears and speculative noise in the futures space,” said OANDA’S Halley. “We are yet to see demand destruction.”

Lending credence to that was Federal Reserve Governor Chris Waller who told a live-streamed event that fears of a US recession were “overblown” and the central bank needed to “front-load” interest rate hikes, raising them early and heavily if necessary, to tame inflation roaring at 40-year highs.

The drone of recession talk has gotten louder across America since the Atlanta division of the Federal Reserve, or Fed, forecast a 1.0% contraction in second quarter gross domestic product, or GDP. Officially, the Commerce Department reported a 1.6% GDP decline for the first quarter. Typically, an economy is considered to be in recession if there are two straight quarters of GDP decline.

A cluster of economic data of late has also suggested that the United States may be headed for an economic slowdown.

A closely-followed barometer of the U.S. service sector hit 20-month lows last month, data on Wednesday showed. The United States also saw the highest number of job cuts in 16 months in June, a private-sector employment tracker said in monthly data on Thursday that indicated the red-hot US labor market may be cooling. That came after the Labor Department reported a day earlier that job openings declined to 11.25 million in May from 11.68 million in April.

U.S. inflation itself has been persistently running at four-decade highs since late last year, with the closely-watched Consumer Price Index growing at an annualized rate of 8.6% as of May. The central bank’s target for inflation is a mere 2% a year and it has vowed to raise interest rates as much as necessary to achieve that.