Oil: Data disappointments to drag WTI below $40 – TDS

Bart Melek, head of commodity strategy at TD Securities, does not expect a crude rally despite a robust inventory draw. He forecasts WTI to trade in a $38-42 range though any data disappointments would drag prices down $40.

Key quotes

“Crude inventories are down a much larger-than-expected 7.49 million bbls (consensus was calling for a build of 250K). Distillate inventories also decreased 456K, in sharp contrast to the expected 1.5 million bbl increase. Meanwhile, gasoline stockpiles fell a very large 3.15 million vs a 1.3 expected decline. Imports fell 1.8 million bpd, with exports growing 156k bpd and production was flat. Implied demand for crude increased a respectable 360k bpd.” 

“With US production not showing additional reductions yet and the rate of demand growth not likely accelerating much in the near-term as COVID-19 infection breakouts in large states such as Texas, Florida, and California, crude will likely continue to have a hard time rallying much above current levels. I expect WTI to trade in a range between $38-42/bbl, in the near-term.” 

“The market will need to see that demand is recovering in a smooth fashion, with little risk of a second wave of COVID infections disrupting demand. At the same time, traders will need to see full compliance from OPEC+ and there will need to be confident that there will not be an increase in US production.”

“Any data disappointments, which reduces risk appetite, will likely pull WTI below $40/bbl. But even if everything goes well on the demand side, the phasing in of production increases by OPEC+ as demand recovers, will likely keep WTI in our range. As such, I continue to be happy with saying that the North American benchmark crude will average $40/bbl in Q3-2020.”