Oil Surges With Stronger Equities and Tighter U.S. Supply View

(Bloomberg) -- Oil’s rally raced forward alongside broader equities markets, boosted by expectations that U.S. crude stockpiles will decline.

Futures in New York surged more than 4%, after settling yesterday at the lowest level since June, moving in tandem with stronger equities on Wednesday. Brent regained its technical footing, sharply rising above the 100-day moving average. The 14-day Relative Strength Index for futures in London and New York was below 30 on Tuesday for the first time since April, signaling the two benchmarks were oversold.

The recovery in equities puts people at ease that the selloff was a bit of an overshoot, said Phil Streible, chief market strategist at Blue Line Futures LLC in Chicago. Plus, more investors may have piled into the commodity since “it kind of went on sale.”

American crude stockpiles are expected to have declined last week for a seventh week in a row. The industry-funded American Petroleum Institute will release its storage numbers later on Wednesday ahead of a U.S. government report. Meanwhile, EOG Resources Inc., America’s biggest independent shale oil producer, forecast a tighter supply picture, saying U.S. oil will likely suffer years of declines and may never regain the peak achieved earlier this year.

“Demand will continue to recover with the global economy, while OPEC+ supply will remain constrained and shale will struggle to grow their output further,” TD Securities commodity strategists including Bart Melek said in a note. “We continue to expect that the oil market will rebalance, and inventories will shrink as we approach” the fourth quarter.

In physical markets, Bakken crude for delivery at Clearbrook, Minnesota, rose to its narrowest discount to WTI futures in roughly a week. On the Gulf Coast, Light Louisiana Sweet crude is trading at its widest premium since late August.

Still, oil prices are heading lower for the week, as faltering demand recovery in parts of the world and the onset of refinery maintenance season weighs on the outlook for consumption that’s already muted by the pandemic. In the latest signal of a gloomy outlook for U.S. oil production and weaker demand, Enterprise Products Partners LP canceled the expansion of its 450,000 barrel a day Midland-to-Echo crude oil pipeline system that connects the Permian Basin with the Gulf Coast.

The picture doesn’t look much better on the refining side. Refinery utilization may stay around 75% of capacity until early 2021, if refineries have to clear the ongoing surplus in oil products inventories, Citigroup Inc. analysts wrote in a report. Meanwhile, refining margins continue to be dismal, with the crack in the U.S. for combined gasoline and diesel below $10 a barrel at its lowest seasonal level in nearly 10 years.

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