The price of oil rose markedly, reaching its highest level in three months and crossing a critical technical threshold. This upward movement can be attributed to signs of a tight oil market, which outweighed the potential impact of the U.S. Federal Reserve’s additional interest rate hike.
West Texas Intermediate (WTI) Indicative Performance
The price of West Texas Intermediate (WTI) crude oil has surpassed $78 per barrel, reflecting the implementation of production cuts by the Organization of the Petroleum Exporting Countries and its allies (OPEC+). This development leads to a gradual decrease in global oil availability, thus creating a tight supply situation in the worldwide market. The upward momentum during the intraday rally was due to an unforeseen failure at Exxon’s Baton Rouge refinery.
As we have learned, the catalytic cracking unit responsible for gasoline production has now shut down. This unpleasant event may lead to a prolonged downtime lasting for several weeks. The 3-2-1 crack, which serves as a metric for assessing the profitability of refining crude oil into fuel, was noticeably impacted during the high-demand summer automotive season. As a result, the 3-2-1 crack reached its highest level since March.
U.S. Crude Oil Is Showing Positive Momentum
U.S. crude oil recently finished trading above its 200-day moving average, a significant technical level that has historically acted as a powerful barrier since August. When oil prices remain above a certain threshold, it can stimulate further buying activity. Oil’s positive momentum is also supported by the risk sentiment in equity markets, which are trading near their highest this year.
Despite production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, crude oil prices have fallen slightly over the year. On the demand side, it should be noted that China’s economic recovery is facing headwinds that have a lasting impact on the industrial raw materials sector. However, it is essential to note that the Chinese government has stated its intention to take measures to stimulate the country’s economy.
According to Rebecca Babin, a senior energy trader at CIBC Private Wealth, some markets have seen the current comments coming out of China as disappointing. However, the potential implementation of stimulus measures is positive for the oil market. According to Babin, current oil prices still need to reflect the potential impact of such stimulus measures fully.
Apart from various other indicators, signs of market resilience can also be seen in the market’s fundamentals. The WTI crude oil delivery spread (the difference between the two nearest contracts) is currently around 36 cents per barrel and is currently in a reverting pattern. This bullish pattern is notable for being near the most comprehensive level since mid-November.