US West Texas Intermediate and international benchmark Brent crude futures rise Thursday after reversing earlier weakness. The early price action suggests that bullish traders may be defending a key area of support through to the July 14th low.
After prices rose last week on worries about tighter supply, prices have fallen significantly this week on renewed concerns about oversupply due to weak fuel demand. The drop in fuel demand is correlated with rising interest rates, which are slowing global economic growth.
If the correlation between rising interest rates and falling fuel demand holds, prices could fall much further as major central banks are likely to continue raising rates until at least September and possibly the end of the year.
At 08:45 GMT September WTI Crude is at $90.97, up $0.31 or +0.34% and Brent Crude is at $94.22, up $0.16 or + +0.17%. On Wednesday, the United States Oil Fund ETF (USO) was trading at $73.55, down $2.38, or -3.13%.
Rising US interest rates are helping to support the US dollar, and with crude oil being a dollar-denominated asset, foreign demand is falling. The assessment comes just a week after Russia’s shutdown of a key pipeline to Europe pushed US crude exports to record levels.
Too little demand leads to too much supply
Data released by the US Energy Information Administration (EIA) showed US crude inventories rose by 4.5 million barrels last week versus expectations of a 630,000 barrel withdrawal.
Gasoline inventories rose 163,000 barrels for the week ended July 29, bucking expectations for a 1.61 million barrel decline.
Distillate inventories, which include diesel and heating oil, fell 2.4 million barrels to 109.3 million barrels on the week, while a 1 million barrel increase was expected, EIA data showed.
Surprisingly, net crude oil imports rose by 2.21 million bpd, the EIA said. The week before, US crude exports surged to an all-time high last week, contributing to a further fall in inventories, driven by foreign demand due to US crude’s large discount to international benchmark Brent.
Last week’s decline in inventories was in large part the result of a surge in crude oil exports to a record 4.5 million barrels a day last week.
As interest rates rise in the near term, the dollar should be supported. This could weigh on foreign demand and put additional pressure on US prices.
We could see a market reversal when exports pick up again, but that won’t happen unless European demand for US energy products suddenly picks up. With their economy also showing signs of weakness, Europeans will find it difficult to increase demand unless key supplier Russia makes another cut.
In the US, demand could also fall further on the back of the Fed’s rate hikes weighing on July manufacturing amid Monday’s weekly PMI report. Also, continue to watch for further releases from the Strategic Petroleum Reserve (SPR) to exert downward pressure.
Technically, the key area to watch is $89.54-$82.80. It’s a wide range, but it’s also the area that separates the bulls from the bears. In my opinion, he controls the longer-term direction of the September WTI crude oil futures contract.