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  • WTI managed to move above $63.00 on Wednesday, as bulls eye a test of 2020 highs in the mid-$65.00s.
  • Positive vaccine news and a generally strong macro backdrop continue to underpin crude oil markets.

Front-month futures contracts for the American benchmark for sweet light crude oil, West Texas Intermediary (or WTI), continues to advance to the upside on Wednesday and briefly even managed to rally above the $63.00 level for the first time since January 2020. WTI has thus pulled off an impressive recovery from Asia Pacific session lows of around the $61.00 level and currently trades close to $63.00, up about $1.25 or about 2.0% on the day. As the bulls remain firmly in control, many crude oil market participants look to be targeting a test of the 2020 high at $65.62 within the next few days/weeks.

Driving the day

Higher US government bond yields might be presenting some impediment to the stock market and risk-sensitive currencies, but not to crude oil markets, or indeed broader commodity markets. Recent moves higher in US bond yields are for the most part being caused by rising inflation expectations, a broadly bullish signal for commodities.

Indeed, the macro backdrop remains very positive for crude oil markets insofar as it is inflationary and the outlook for demand looks increasingly strong; 1) the US House is moving ahead with a vote on US President Joe Biden’s $1.9T stimulus bill on Friday (which is expected to pass), 2) Fed members continue to assure markets that easy monetary conditions are here to stay for the foreseeable future and 3) positive vaccine news continues to pump the “reopening” trade, which is also being seen in equity markets (stay-at-home tech suffering whilst return to normality stocks do well).

In terms of the latest vaccine news; the FDA just published a briefing document on the Johnson & Johnson vaccine and it looks likely that the vaccine will get emergency use authorization fairly soon. As a result of the above-noted positives, banks have been increasing their estimates for US GDP growth in the coming two years, with HSBC the latest (the bank now expects 2021 GDP growth of 5.0% versus its previous forecast of 3.0% and 2022 GDP growth of 3.0% versus its previous forecast of 2.5%).

Crude oil markets also seemed to respond positively to a mixed, somewhat difficult to interpret weekly US Energy Information Administration Crude Oil Inventory report; headline crude oil stocks saw a very small but surprise build, confirming the surprise build indicated by Tuesday’s weekly API report. However, Distillates saw a larger than expected draw. Meanwhile, US output dropped to an average of 9.7M barrels per day (a 1.1M drop on the week before) and refinery utilisation was down 14.5%, more than the expected drop of 9.0%. Remember that the latest EIA report is being distorted by severe weather-related production disruptions seen across the Southern US states last week.

Looking ahead, crude oil markets are likely to continue to focus predominantly on the demand side of the equation, meaning pandemic/vaccine-related updates remain important, as does Fed speak and the legislative progress of fiscal stimulus in the US. Given positive sentiment on these fronts, crude oil is likely to remain underpinned.


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