Asia Oil: High disappointment levels leak into price action via bearish API inventory report

After running into a wall of offers at $41.50 into the NYMEX open, the enduring oil market rally appears to have run out of steam as profit-taking initially set ahead of some critical inventory data, which was likely exacerbated by technical factors as the pieces entered the upper border of the March price gap. That chart zone is one of the essential levels of resistance within reach, and a smidgen above the price where it’s thought that US producers could be encouraged to ramp up production. 

But profit-taking was likely further sustained from the real-life Covid-19 drama that’s front and the center in virtually everyone's minds. The US government's top infectious disease expert sounded the alarm bell, reminding the world the virus threat remains acute as California reported its most significant daily jump.

While the speed and size of the fiscal response to the downturn have helped to cushion households through this downturn, if the flu continues to spread consumers will feel unsafe to leave their houses and a self-imposed stay-at-home mandate will continue to hamper the US economic recovery. 

As far as the inventory data is concerned, the oil markets can’t seem to get it over the finish line as the API confounded traders with an alarming increase in crude oil inventories of 3.857 million barrels after analysts had predicted a smaller build. Generally the market would take these numbers in its stride, but I suspect expectations were running high for even a draw given the Cristobal effect. Hence there’s a high level of disappointment leaking into the price action this morning. 

All in all, this will be a good test for the market’s bullish resolve as WTI price action shuffles towards the psychologically crucial WTI $ 40 per barrel.   

There was also the introduction of new risk factors after oil futures plummeted when US trade adviser Peter Navarro said in a TV interview that the trade deal with China was "over."  While the comment was later walked back by President Trump, the short-lived hit to oil demonstrates how sensitive the price is to lousy news.

While prices were generally trading higher into the NYMEX on reports of more progress within OPEC+ enforcing compliance with the production cut agreement, the Covid-19 wall of worry was too big to climb and sentiment turned sour as a second wave of the coronavirus continues to grow, all the while omnipresent risk of a rebound in US onshore production lingers in line with higher prices.

But, at the end of the day, there are two primary conditions for WTI oil prices to make significant headway above $41: (1) a draw on the weekly inventory report, and (2) a fall in daily case counts in at least two of the three most populous states were not met, likely encouraging more tapering of long positions.