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Crude Oil, WTI, Brent, OPEC+, Fed, China, RBOB Crack Spread, Backwardation – Talking Points

  • Crude oil is on the front foot going into August after an astounding July
  • OPEC+ production cuts might be having their desired effect as growth pick up
  • The structure of the WTI futures market might be saying something. Will WTI go higher?

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How to Trade Oil

Crude oil prices streaked higher again to start the week to complete a blistering run last month that saw the WTI futures contract add 15.80% and the Brent contract gain 14.15%.

A combination of a potentially less aggressively hawkish Federal Reserve, OPEC+ cuts to production and the possibility of global growth remaining robust enough to withstand the prospects of a deep recession appear to have reassured the energy market.

The interest rate market has now ascribed only a very low probability of a tightening in monetary policy at the Federal Open Market Committee (FOMC) meetings through to the end of this year.

Furthermore, the market is looking for over 100 basis points of cuts by the Fed by the end of 2024.

The extension of Saudi Arabia’s production cut of 1 million barrels per day (bpd) into August was compounded by Russia announcing that they too reduce output by 500,000 bpd.

A squeeze on supply comes at a time when financial markets are clocking a more positive attitude toward the prospect of avoiding a prolonged downturn.

Earnings results for the second quarter have mostly been seen as healthy by the market and the forward-looking guidance appears to have given investors confidence. This is reflected by all the major equity indices gaining ground over the last few weeks.

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Potentially lending some support to black gold is the RBOB crack spread that has been ticking up of late. The RBOB crack spread is the gauge of gasoline prices relative to crude oil prices and reflects the profit margin of refiners.

RBOB stands for reformulated blendstock for oxygenate blending. It is a tradable grade of gasoline. If profitability increases for refiners, it may lead to more demand for the crude product.

Supporting the perspective of growing demand for oil has been the move up in the price of the front month WTI futures contract above the price of the contract maturing just after it.

This is known as backwardation. It might reflect an expanding need for buyers to take immediate delivery rather than wait for a longer period.

Looking forward, the American Petroleum Institute (API) inventory report and the US Energy Information Agency (EIA) weekly petroleum status reports will be watched closely for clues on shifting demand and supply.

Updated crude oil prices can be found here.

WTI CRUDE OIL, RBOB CRACK SPREAD, VOLATILITY (OVX)

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Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCarthyFX on Twitter



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