Oil market remains vulnerable

There is rising volatility in the oil market, with Brent plunged from daily highs around $64.60 to $62.50 and finished around the $63 handle on Wednesday. It looks like traders remain at a loss due to a number of conflicting signals and drivers in the industry. Today, the futures are trading with a modest bullish bias but downside risks persist.

The Energy Information Administration on Wednesday reported that US crude supplies fell by nearly 11 million barrels for the week ended July 19, which was in line with API estimate and more than double the 4.5 million-barrel decline expected by traders. Moreover, domestic oil production fell by 700K barrels to 11.3 million barrels last week. However, the bullish numbers were a result of the Hurricane Barry which caused major distortions in the data. As such, after the initial euphoria, traders switched to profit-taking and sent the prices lower.

Also, the market came under pressure following the reports that Saudi Arabia and Kuwait look to resume oil production in the so called Neutral Zone, which could bring additional supply around 500K barrels per day. This signal adds to worries about global oversupply, especially amid the lingering concerns over a weaker demand due to a slowing global economy.

In the short-term, Brent may follow other riskier assets, which in turn will be influenced by the upcoming ECB meeting. Should the central bank’s tone come too pessimistic, oil futures could come under additional pressure.
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