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Will Crude Dip or Flip?

07/08/2020 6:00 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Phil Flynn reports on the fundamental drivers in the crude oil market.

Crude oil prices are dipping as it tries to create a floor near $40. The market is being challenged by Germany’s industrial production data, which hit 7.8% but missed expectations of 10%. Concerns about record-breaking cases of the coronavirus are also weighing on market sentiment. Yet globally, crude oil demand remains strong even as the Atlanta Federal Reserve sees signs that the U.S. economy is leveling off or stalling is offering support.

Still, U.S. China Trade war concerns are lingering. Put on the flip side, OPEC compliance to cuts is robust and reports that Saudi Arabia and Russia have persuaded Angola to comply with production cuts and compensate for past cheating fully should push agreement to the recent historic production cut to near 100%. Iran and Nigeria have also agreed to do the same. We think oil will flip later today despite the dip.

Oil Price reported that, “China’s crude oil imports in June hit a record high, in a sign that the coronavirus is not hampering China’s thirst for crude oil. In June, according to data compiled by Oil, China’s crude oil imports hit a record high of 11.93 million barrels-per-day (bpd)—an increase of 820,000 bpd from May levels, which were also at record levels. This 11.93 million bpd represents a 2.4 million bpd increase year over year, which is a 25.4% increase.”

The increase in Chinese imports should bode well. Even though Germany’s industrial output missed its energy demand is still rising. In the U.S. though Covid-19 fears are raising concerns that U.S. oil demand comeback may struggle.

Market Watch reports Atlanta Fed President Raphael Bostic said in an interview the U.S. economy was leveling off. “There are a couple of things that we are seeing, and some of them are troubling and might suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise.” He said the regional central bank was trying to figure out “whether this leveling off is something that is a more sustained pattern, or just a pause.”

The American Petroleum Institute should report another draw in crude supply. Gulf Coast supplies are falling because of the OPEC cuts. Cushing will rise and more oil will go into the Strategic Petroleum Reserve. We should set the low for the week today.

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