Crude prices partially rebound a day after biggest plunge of 2021

Crude oil futures rebounded somewhat July 20 after the biggest single-day drop in prices of 2021, signaling the day prior was a bit of an overcorrection and also anticipating more bullish US inventories data this week.

Front-month NYMEX WTI gained $1 to settle at $67.42/b on the final day of trading on the August contract, while ICE September Brent rose by 73 cents to settle at $69.35/b. NYMEX September WTI, which moves to the front of the curve July 21, picked up 85 cents to settle at $67.20/b.

NYMEX August RBOB jumped by 2.11 cents to $2.1315/gal, and August ULSD increased by 2.75 cents to $2.0127/gal.

Crude prices plunged July 19 because of the new OPEC+ deal that will return more crude production to markets, as well as fears of the spread of the coronavirus delta variant muddling the demand picture. Crude futures plunged about 7.5% and followed the stock market freefall as the Dow Jones Industrial Average, for instance, fell by more than 2% July 19, losing about 725 points.

However, the Dow Jones jumped by about 1.8% July 20, regaining roughly 600 points.

Robert Yawger, director of energy futures for Mizuho Securities, said the crude oil fundamentals did not change in 24 hours.

"It is my opinion that crude oil is higher today on bottom pickers stepping into the void and pushing higher," Yawger said. "Crude oil has traded lower than 5% on three occasions in the past year. Each time the market was up over 1% the next day."

The July 19 price drop needs to be kept in context considering crude values remain relatively healthy for the energy sector, said Craig Erlam, senior market analyst for OANDA.

"Oil prices are holding steady on Tuesday after taking a hit at the start of the week, on the back of the OPEC+ agreement and the uncertain growth outlook for the rest of the year, given recent (COVID-19) surges," Erlam said. "Prices are still elevated compared to what we've seen since the pandemic hit, but that's to be expected as countries navigate themselves through the final stages."

OPEC views

While the revised OPEC+ deal is actually good for energy markets and stability, according to Ernie Barsamian, CEO of The Tank Tiger terminal storage clearinghouse, the agreement also means even more OPEC+ production next year with more countries' baselines being revised upward.

"With this in mind, past history has enlightened us to the possibility of oversupply next year," Barsamian added, which may explain why backwardation pricing remains in effect.

The deal allows OPEC and its allies to ease production cuts by 400,000 b/d each month starting in August, amounting to a 2 million b/d total increase by the end of the year. The deal also extends the OPEC+ supply management pact to the end of 2022, from its previous expiry of April 2022.

The United Arab Emirates -- the source of the previous stalemate -- will receive a 332,000 b/d boost to its reference production level, from which quotas are determined, starting in May 2022. But Saudi Arabia and Russia also get 500,000 b/d baseline increases each, while Iraq and Kuwait will receive 150,000 b/d hikes, in a surprise compromise. These extra volumes next year come in addition to the Saudis planning to unwind their additional voluntary cuts.

Inventories projections

On the more bullish side, commercial crude oil and refined product draws are expected from US inventories in the week ended July 16, amid the busier summer driving season and a small expected uptick in refinery demand, analysts surveyed by S&P Global Platts said July 19.

Total US commercial crude oil stocks likely declined by 6.7 million barrels to 430.9 million barrels, analysts said. The draw would leave stocks more than 8% below the five-year average of US Energy Information Administration data and the lowest since the week ended Jan. 17, 2020.

Last week, crude prices fell when US gasoline stocks rose and implied fuel demand fell by much more than anticipated after the busy July 4 holiday weekend.

However, relatively strong US driving demand likely offset the higher refinery runs and contributed to gasoline inventory draws last week. Analysts surveyed by Platts saw gasoline stocks dip by 1.1 million barrels lower in the week ended July 16, putting inventories at about 235.4 million barrels. The expected draw would put inventories about 1% below the five-year average.

Yawger said he also expects a gasoline inventory draw of about 1 million barrels because of ample US driving demand.

"Wednesday's EIA report has the potential to put a floor in the market or accelerate the slide in prices," Yawger said. "If you don't need the gasoline, you don't need the crude oil to make gasoline. In one report, one bad gasoline number managed to change demand perceptions for the worse in the middle of summer driving season."