CRUDE OIL FUNDAMENTAL FORECAST: BEARISH

• Crude oil prices continued to rise into the weekend as market structure improved
• EIA, OPEC reports point to near-term risks, but rosier conditions later this year
• Market backwardation is encouraging refiners to ramp up available capacity utilization

Crude oil prices continued to push into fresh multi-month highs last week but prices began to pull back on Thursday as traders digested a report from the International Energy Agency (IEA) that showed a lower global consumption forecast for 2021. The IEA cut its consumption outlook by 200k barrels per day (bpd), with Covid and its economic impacts cited as the primary headwinds – particularly recent setbacks to Europe’s vaccination efforts. Still, WTI prices pushed over 2% higher on Friday, taking back Thursday’s losses and then some.

The IEA noted that demand will begin to outpace production later this year, helping to erode storage levels even as producers pump out more oil to take advantage of higher prices. OPEC released its monthly report shortly after, projecting that the cartel will need to increases its output for 2021 by nearly two million additional barrels per day to meet the forecasted 27.5 million bpd outlook. Overall, the reports pointed to a still-fragile energy market that is highly susceptible to the course of Covid-19.

WTI CRUDE OIL MARKET STRUCTURE

Chart created with TradingView

While outlooks from the IEA and OPEC bode well for longer-term oil prices, the recent price surge has may have exceeded market expectations and a short-term pullback should help realign those forces. That said, next week may give way to a degree of weakness. Any pullback may be short-lived – outside of large supply or demand shocks – with the current price structure in futures reflecting a tightening supply outlook.

Currently, the oil market is in backwardation. This occurs when spot prices are higher than further-dated contracts. The alternative scenario – spot prices are lower than futures contracts – is referred to as contango. That said, backwardation suggests a near-term bullish market structure with tightening inventory levels. This may encourage refiners to tap deeper into storage as they ramp up production to take advantage of higher - illustrated in the US oil landscape by the chart below. With that said, an increase in output down the road may make it harder for energy prices to maintain aggressive momentum.

US OIL INVENTORY VS US REFINERY OPERABLE CAPACITY