WTI recovers back above $120 post-US inventory report, as bullish trend remains intact

• WTI has recovered back above $120 after the latest US EIA inventory report showed gasoline stocks falling unexpectedly.
• Prices remain well supported against the backdrop of strong and rising demand plus OPEC+/Russia supply woes.
• Bulls will continue to target a test of $130 for the weeks ahead.

Despite just-released weekly US EIA crude oil inventory data confirming that, as Tuesday’s Private weekly API inventory report had implied, headlines US crude oil stocks rose unexpectedly last week, the data still showed a decline in gasoline inventories, suggesting demand in the US remains robust. This helped front-month WTI futures move back from close to session lows in the mid-$119s per barrel back to the low-$120s, leaving prices not far below the multi-month peaks they hit earlier in the session in the low-$121s.

Traders also cited reports of a potential halt to production in Norway amid threats of strike action amongst oil workers there as offering some modest support. Crude oil prices have been trading with an upwards trajectory in recent sessions and weeks, with demand in North America and Europe rising as peak summer driving season hits and in China as Beijing and Shanghai reopen with Covid-19 now seemingly under control there. Against the backdrop of strong and recovering demand, global oil markets are very tight right now.

Reuters reported on Wednesday that refinery margins for diesel are at record highs in Asia and most global refineries are running at close to full capacity, as Russian exports of refined products falls amid Western sanctions over its war in Ukraine. Analysts view OPEC+’s decision last week to increase output quotas by 648K barrels per day in July and August as insufficient to make up for the loss of Russian output this summer, given that these output hikes were evenly spread across OPEC+ producers, many of whom aren’t able to actually increase output.

“Unless new Middle East capacity comes online more quickly than we expect or China decides to lift its products export caps, the shortage of (refined) products will only get worse as demand for transport fuels picks up during the northern hemisphere summer,” JP Morgan said in a note on Wednesday. Separately, the CEO of Trafigura said that oil could hit $150 this year against the current backdrop.

Give all of the above, it seems more likely than not that WTI continues its recent upwards trajectory that has seen it rally more than $16 per barrel since the start of May. Oil bulls will continue to target a test of March’s near $130 highs in the coming weeks.