WTI probes $79.00 after bouncing at key $77.00 level support

Crude oil prices have been tentatively recovering ground after hitting six-week lows as the US session has gone by, following a sharp drop on Wednesday that carried all the way through into the early Thursday European session. Front-month futures contracts for the American benchmark for sweet light crude oil, West Texas Intermediary or WTI, has rallied back to prove the $79.00 level in recent trade, a decent recovery from earlier session lows just above $77.00. That still leaves WTI prices about $2.0 or 2.5% down on the week.

Technical buying after WTI bounced from a key area of support (the 6 July high at $77.00) appears to be the main driver of Thursday’s modest recovery. From a fundamental standpoint, recent updates remain mostly bearish and, as a result, any recovery back towards the $80 area might prove nothing more than a dead cat bounce. The US is gearing up for a crude oil reserve release and has pressing major Asian oil imports to join it, including China, Japan and South Korea. Chinese authorities have already said that they are preparing for a crude oil reserve release.

Meanwhile, the European demand outlook this winter is faltering as Covid-19 infections surge and government reinstates varied degrees of lockdown restrictions. In terms of the latest on that front, the European press is reporting that Austria could be about to reimpose full lockdown, the Netherlands has introduced a partial lockdown and now Germany is talking about a lockdown for the unvaccinated if hospitalisations cross above a certain threshold.

Elsewhere, and in terms of the broader supply/demand balance that is the most important long-term factor for crude oil markets, market participants are getting jittery about the 2022 outlook. Earlier in the week, the Secretary-General of OPEC+ said he expects oil markets to have returned to a surplus (i.e. more supply than demand) by December, while the oil minister from the UAE said he expected a surplus in Q1 2022. Output is expected to grow in the coming months in the US, as output returns back to pre-pandemic levels. Output is also expected to grow significantly from OPEC+, as the cartel continues to increase its production quotas each month and as OPEC+ nations who have involuntarily struggled to keep up with OPEC+ output hikes catch up. That crude oil prices will moderate in 2022 appears already to be a consensus view.