Asia Oil: With prices in a sweet spot, a new trading range beckons

Oil prices appear to be in the right spot, possibly poised to take the next step higher and forge a new trading range above Brent $45.00 after US crude stocks fell for the third consecutive week and are clearly on a downwards trajectory. And with product stocks decreasing, favorably for global oil prices, it suggests the demand recovery is continuing to grind higher. 

Most of these draws did occur in PADD 3 (Gulf Coast) as net imports start to normalize. However, Cushing (Oklahoma) stocks have risen for six consecutive weeks – up 7.7mb (17%) over that period – although we’re still far from concerns about hitting 'tank tops.' 

But production curtailments, either planned or forced, continue to provide the oil market with the most significant backstop. 

US crude production fell 0.3mbd w/w due to the re-benchmarking to the EIA's Short-Term Energy Outlook's latest monthly figures, which were lower than previous estimates. Subsequently, US crude production is estimated to be below 11mbd at 10.7mbd – 2.4mbd below the March high and a decline of 1.6mbd y/y. Complimenting that view, the oil rig count fell by four last week to reach a new low – down 74% since the start of the year; just 176 rigs are operating across the US compared to the cycle high of 888 in 2018, and the OPEC + agreement is working as intended.

Oil prices are artificially propped up through OPEC + intervention and US curtailments. So oil market sentiment continues trading lineal to broader markets where risk continues to flourish as investors turn a blind eye to the lack of immediate progress in efforts for Congress to negotiate another stimulus package, but aware that one is coming. 

But even worries around stalled US fiscal talks are partly offset by the US administration's conciliatory tone on China's compliance with the "Phase One" trade deal; the upcoming six-month assessment seems unlikely to prompt any significant fireworks. Also, investor optimism remains high on a vaccine cure that’s no longer being viewed as a pie in the sky. Finally, the US dollar weakness helps oil prices in general, but even more so in this environment as the weaker US dollar reflects a global "risk-on" environment, not a flagging US economy. 

Is appears the oil markets ladder is well buttressed, so why aren't Crude prices climbing higher?

Global Covid-19 cases now exceed 20m, so in the absence of meaningful progress on a vaccine, traders are still looking over their shoulder to where new lockdowns might be necessary. And given the transitory nature of US production, any rebound in US shale output will complicate the bullish view.