Asia Oil: Something will shake crude out of its trading range, just not today

Something will inevitably come along to shake crude out of its trading range, just not today. 

Despite yesterday's short-covering rally, I still think it’s more likely negative than positive. Yet, Brent tested the upper quadrant of the market’s perceived bookended ranges overnight after getting a double booster vaccine shot in the arm before succumbing to the economic reality for prompt oil demand in the Covid-19 environment.

Like broader markets, the critical sentiment driver appears to be the pace of ongoing recovery in the global economy and optimism around the vaccine. At the same time, the EU summit likely had a small positive knock-on sentiment effect. But this move was all about a recession stopper in the form of a vaccine. As progress is made on vaccines, the back end of the curve is consolidated above $50 and had a positive trickling down effect on the front-end contracts.

The entire complex was trading up on Tuesday afternoon before the API's data release, with markets ignoring the uptick in the number of new coronavirus cases in the United States. Instead, traders were focusing on vaccine hopes and a successful European stimulus package that was passed. But the large and highly unexpected crude inventory build will provide another obstacle for oil to climb.

The American Petroleum Institute (API) estimated a build in crude oil inventories of 7.544 million barrels for the week ending July 17; that survey is way off the market estimates, which were pricing in a draw of closer to 2 million. Indeed, this brings unwelcome focus to the ongoing problem of high global inventories and could limit the upside for oil over the short term, even if the bump were due to a mismatch in exports vs. imports.

While EU market analysts have written about critical structural positives of the EU deal for many weeks, as far as having an impact on prompt oil the near-term effect will be rather mute. Money flow will take months to be operational, not to mention the growth impact will take years to show up.

Oil markets simply don’t have the luxury of looking through the rise in Covid-19 while gaining the same immediate sentiment boost from government stimulus that the forward-looking stock markets receive. When it comes to oil demand or commodities for that matter, it's all about the here and now.

Government stimulus cannot bridge the immediate downside shift in oil demand as large and economically significant US states remain in lockdown, nor can they paper over consumer virus fear. While OPEC provides an enduring backstop, the pace of oil price improvement in the face of real virus demand risks will likely remain slow-moving.