Oil Price Forecast: Testing Highest Level Since April Amid Record Drop in US Inventories

Highlights

• WTI crude oil prices surged by almost 1% on Wednesday, reaching their highest level since April.
• US oil inventories witnessed a remarkable 15.4 million barrel drop, exceeding estimates by a significant margin.
• Strong demand in the US and supply cuts by oil-producing nations contributed to the rise in oil prices.

Overview

US Benchmark West Texas Intermediate (WTI) crude oil prices surged by nearly 1% on Wednesday, reaching their highest level since April. This impressive growth came as a result of strong demand from the United States, the world’s largest fuel consumer, which managed to offset concerns about demand in other regions.

API Reports Record Drop in Oil Inventories

The latest data on US oil inventories, from the American Petroleum Institute (API), revealed a remarkable drop of 15.4 million barrels in the week ending July 28, far surpassing analysts’ estimates of a 1.37 million barrel decrease. Should the US government figures confirm this drawdown, it would represent the most substantial decline in crude inventories since records were first kept in 1982.

Gasoline, Distillate Stockpiles Decline

Additionally, gasoline inventories fell by 1.7 million barrels, outperforming expectations for a 1.3 million barrel decline. Distillate stocks also demonstrated strength, falling by 510,000 barrels, in contrast to the anticipated 112,000 barrel build. These indicators collectively reflect robust demand for prompt fuel in the US.

Seasonal Peak Demand, Output Cuts Impact Prices

The rise in oil prices can be attributed to the seasonal peak demand period for transportation fuels and the supply cuts implemented by oil-producing nations. Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC), has taken significant production cuts to support prices.

Saudi Arabia to Extend Production Cuts

As demand continues to outpace supply, crude oil inventories are falling in other regions as well, further supporting the upward trend in oil prices. Experts predict that Saudi Arabia will extend its voluntary oil output cut of 1 million barrels per day for another month until September, as discussed in a meeting of producers on Friday.

Gains Could Be Limited

While oil prices may continue to rise, they are not expected to exceed $90 a barrel due to recessionary pressures in regions such as Europe. Additionally, as the summer demand peak subsides, oil prices are likely to reach the end of their current upward trajectory.

Weak PMI Data Raises Concerns Over China Demand

Despite these positive developments, concerns linger about a potential slowdown in oil buying from China, the world’s leading oil importer, as prices continue to rise. Recent weak PMI data also raises questions about fuel demand, which may be weaker than initially expected. Nevertheless, the market remains primarily driven by supply constraints, with potential political volatility always looming.

Short-Term Outlook: Bullish Tone, but Facing Headwinds

In conclusion, the recent surge in US benchmark WTI crude oil prices is a result of robust demand from the US, coupled with significant drawdowns in inventories. As supply cuts persist and demand remains strong, oil prices are anticipated to continue their upward trend, albeit with potential limitations beyond $90 a barrel and concerns about demand in certain regions. Traders should keep a close eye on geopolitical developments and any shifts in demand dynamics to make informed decisions in the current market climate.

Technical Analysis

The 4-hour chart data for Crude Oil indicates a cautiously bullish sentiment. Despite a slight dip in the current 4-hour price compared to the previous one, the price remains above both the 200-4H and 50-4H moving averages, indicating an overall bullish trend. The 14-4H RSI reading of 68.92 suggests strong momentum. However, the current price is trading within the main resistance area of 81.73 to 83.63, which could lead to potential resistance and a pullback. Traders should closely monitor the price action around the main resistance area for potential breakout or reversal signals to make informed trading decisions.