Oil balancing weakening demand with accommodative policies

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The fundamentals took control of the short term oil price direction over the last two sessions even though there is still no sign that any of the massive QE programs are going to end anytime soon. Today the main event will be U.S. Fed Chairman Bernanke’s testimony before joint Congressional economic committees as he once again updates the world on the state of the U.S. economic recovery. As is always the case when the Chairman speaks the market will parse his every word to see if there are any signals coming out that suggest how much longer QE3 is going to last.

Back to the fundamentals… although the API oil inventory data often times is misleading it was certainly bearish across the board (see below for more details) and yet another sign that oil fundamentals remain weak at best. There are currently no signs from any of the internal or external data points suggest that oil demand is heading for a growth spurt anytime soon. So the battle between a weakening oil demand picture versus the support coming from the very accommodative monetary policies in the developed world economies continues with the winning side flip flopping back and forth as we have already seen over the last 24 hours.

After losing its widening momentum late last week, the July Brent/WTI spread has breach the $8.25/bbl technical support level and remained below this level for the entire trading week so far. The spread is back in its narrowing trend (at least for the moment) even after the API reported (in last night’s report) a modest 471,000 barrel build in Cushing crude oil inventories. The API and EIA reports have been very consistent in their reporting of Cushing crude oil stocks and as such I would expect a similar build in this morning’s EIA report.

So far the market has not been placing much emphasis on the upcoming June maintenance schedule in the North Sea as the Brent/WTI spread continues to slowly decline. Even though Cushing crude oil stocks increased this week the possibility that additional refining capacity should return in the mid-west increasing crude oil demand the current narrowing of the spread may garner some fundamental support.

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