WTI holds in positive territory despite demand side risks, bulls look to $42 psychological number

The price of a barrel of oil on Wednesday has perked up despite the increased tensions between the US and China or the threats of a second wave of the coronavirus.

WTI, at the time of writing, is trading at $41.88 and is climbing.

The price has reached a high of $41.92 in the New York session, rebounding from $41.12 lows printed at the open. 

API’s data release sell-off bought back

WTI was trading up on Tuesday afternoon prior to the API’s data release as investors were focusing on the vaccine prospects and a successful European stimulus package that was passed.

In fact, prices had reached levels not seen since March, prior to the oil price war that Russia and Saudi Arabia waged on the world.

Then, the prices fell as the American Petroleum Institute (API) estimated on Tuesday a build in crude oil inventories of 7.544 million barrels for the week ending July 17.

In the previous week, the API reported a major decrease in crude oil inventories of 8.322 million barrels, after analysts had predicted a much smaller draw.

However, the initial sell-off following the API data has since been bought back.

Optimism shines on 

Over the past few weeks, energy markets have been bounded by a lull in commodity demand growth and a wavering supply-side narrative.

However, there is increased optimism shining through this week as investor hopes for a vaccine, government stimulus packages and V-shaped economic recoveries open up the demand side playbook.

Earlier this month, OPEC agreed to relax on August 1 its production cuts that it had set for the last couple of months, with the anticipation that demand would improve accordingly.

OPEC will reinstate 2 million barrels per day of oil production from its 9.7 million bpd that it had cut in May, June, and July.

OPEC did, however, warn that another possible wave of the coronavirus—particularly in the United States—would continue to sap demand.

For this week, particularly, the unprecedented stimulus package the European Union leaders agreed upon at the eleventh hour was welcomed by markets boosting demand-side optimism. 

COVID-19 risks are real

The surge in cases of COVID-19 has seen the reinstatement of restrictions in several states in the US.

There are fears that the rollbacks could trigger another price slump if economies start to shut down again and demand nosedives.

A rise in infections in Los Angeles has got to a point where authorities are now considering introducing stay-at-home orders to stop the spread. 

While our real-time commodity demand indicator has shown signs of resilience, concerns over the sustainability of the recovery in US energy demand are growing stronger, as the contagion spreads in high consumption regions,

analysts at TD Securities argued.

While we continue to see tailwinds to demand, via the global economic recovery, WTI crude oil prices may still remain range-bound for the time being.

In this context, the shale patch remains key to the longer term future of crude oil prices.

The anatomy of a "Great Rebalancing" suggests shale production has peaked for the foreseeable future, which would create a set-up in which energy prices could potentially trade significantly higher in a post-pandemic world.

 

Looking ahead, markets will continue to look for news on the spread of COVID or potential vaccines for direction.

US-China tensions being noted

Meanwhile, relations between China and the United States have plummeted in the past year.

The threat of the ongoing trade war is starting to rear its ugly head again which is a bearish prospect for global trade and oil demand. 

The tensions stem from the coronavirus pandemic as well as the US criticism of China's human rights abuses in Hong Kong and Xinjiang.

Just today, the United States government has abruptly ordered China to "cease all operations and events" at its consulate in Houston, Texas, according to the Chinese Foreign Ministry, in what it called an "unprecedented escalation" in recent actions taken by Washington.

The State Department has not clarified what, if any, particular incident triggered the US demand to close the embassy or when it made that demand.

However, a spokesperson for the State Department said in a separate statement that China "has engaged for years in massive illegal spying and influence operations" and that those "activities have increased markedly in scale and scope over the past few years."

WTI levels