There is a strong case to put a bullish spin on yesterday’s performance. After all, prices did not tank after the release of the weekly EIA stats although a major sell-off would have been completely reasonable. It is best to start with US commercial oil inventories that grew by nearly 9 million bbls. They are just 500,000 bbls short of the all-time high of 1.46 billion bbls reached two weeks ago. They imply that OECD inventories are very close to 3.5 billion bbls, not exactly the hallmark of a bull market.

Crude oil inventories went against expectations and built 4.9 million bbl, all of it in the US Gulf Coast. Cushing stocks were up by 1.4 million bbls and domestic production refused to fall; it has been at 11 mbpd for the last five weeks. The two crude oil futures contracts settled essentially unchanged and rallied some 70-80 cents/bbl off the lowest prints on the day.

Distillate inventories are at their highest level nationwide since 1982 yet NYMEX Heating Oil only lost 93 points. The only silver lining was the unexpected drawdown in gasoline stocks. It was exclusively down to the 3.4 million bbls decrease on the US East Coast where refiners were operating at their lowest ever level of less than 37%. This support for gasoline, however, could easily disappear next week. According to IHS Markit’s Market Intelligence Network a total of six gasoline cargoes are set to arrive in New York Harbour in the coming week. Nevertheless, NYMEX RBOB received a timely support and gained 31 points on the day.

Demand figures were also disheartening. Total product demand was down 826,000 bpd week-on-week. Gasoline consumption is unable to break over 8.8 mbpd and stood at 8.6 mbpd, slightly down from the previous week. Distillate demand took a 469,000 bpd hit and fell to 3.2 mbpd.

The resilience was probably due to stable stock markets. Deteriorating relations between the US and China and the steady worldwide increase in confirmed coronavirus cases were once again ignored. The US has ordered China to close its consulate in Houston whilst more than 15 million people have been infected with the virus worldwide. Instead, focus was on the record monthly jump in existing US home sales last month. The latest US jobless claims report to be released at 12.30 GMT today will be closely watched by equity investors and will likely to have an impact on oil prices, too. The deal on the EU’s €750 billion recovery fund agreed two days ago strengthened the euro against the dollar, which, in turn, prevented oil prices from falling.

Mixed signals on the demand front

There is a broad consensus on global oil supply. Non-OPEC production is not expected to grow in the second half of the year. The OPEC+ group is widely anticipated to remain disciplined in coming months and stick to the output agreement struck in April. Laggards have promised to be obedient. Whether the supply side of the oil balance is bullish or bearish is open to interpretation, but no big surprise is forthcoming from that direction.

Uncertainty comes from demand. The coronavirus has not been contained, partial lockdowns are being reintroduced across the globe and the global economy, albeit it started its painful recovery, is nowhere near the pre-pandemic level. Global oil demand is set to register a massive jump in the second half of the year from the last quarter but the million dollar question is whether the latest growth estimates will be cut due to the flare up in infections or not. Indicators that usually reliably reflect the view of the market are now sending out contradicting signals. These are equities, gold and the dollar.

As outlined in Monday’s report stock markets are strong. The optimism does not imply any concern amongst investors that the pandemic could have an adverse impact on global or regional economic growth. Equities are clearly disproportionately stronger than oil. The S&P 500/Brent ratio, for example, is currently at 74 (the index value divided by Brent price). It averaged at 46 in 2019. Maybe further support will come in the immediate future as it has dawned on the US President that the best way to stimulate the economy is to wear masks. Although the job market, the manufacturing and the service sectors are showing impressive improvements from March and April the road to full economic recovery is long and rocky. As stocks are running well ahead of reality a correction is due sometime this year.

Maybe galloping gold prices are the strongest sign yet that financial investors do not believe in protracted demand growth. Gold is considered one of the safest havens and when money is pouring into this asset class investors in riskier financial vehicles ought to be careful. Gold is at its highest level, over $1,870/ounce, for almost nine years. One ounce of this precious metal costs almost 42 times as much as a barrel of Brent crude oil when last year’s average ratio was half as much. There must be a reason why investors presently favour gold and this does not bode well to equities and oil.

However, it is not all gloom. Genuine price support comes from the weak dollar, which helps physical oil demand. Ever since oil prices found their bottom in the second half of April and started their upward journey the dollar has been weakening. Its index against major currencies has lost almost 6% of its value. Consequently, oil prices in local currencies have remained relatively cheap. Front-month Brent in dollar has strengthened 130% since April 21. The increase in Euro was 115%. The insatiable Chinese thirst for crude oil is partly the result of the strength of its currency. Brent priced in yuan has also registered smaller gains than in dollar over the past three months. It is imperative to follow the dollar exchange rate as a layer of oil demand support will disappear should the greenback start strengthening again.