Crude oil inventories rise unexpectedly

U.S. crude oil inventories increased by 180,000 barrels for the week ending August 2, according to The American Petroleum Institute (API), falling short of analysts’ forecast of an 850,000-barrel build.

The previous week, the API had reported a 4.495 million-barrel draw in crude inventories. This week’s increase breaks a five-week streak of API-estimated inventory draws, which had totaled a loss of 24 million barrels during that period.

Key points:

1. The broader market is rebounding, and oil prices are following suit.
   
2. Rising tensions in the Middle East are fueling speculation in oil trades.
   
3. Positive economic data from the services sector has halted the recent market decline.
   
4. Attention will shift to crude oil inventories tomorrow, especially after a five-week period of declining stockpiles.
   

Crude oil price increases

On Monday, the Department of Energy (DoE) reported an increase of 0.7 million barrels in crude oil inventories in the Strategic Petroleum Reserve (SPR) as of August 2, bringing the total to 375.8 million barrels.

Oil prices saw a slight increase on Tuesday ahead of the API data release. As of 3:35 PM ET, Brent crude was up $0.12 (+0.16%) at $76.42, which is over $2 per barrel lower compared to the previous week. Similarly, the U.S. benchmark WTI was up $0.21 (+0.29%) at $73.15, also down roughly $2 per barrel from the same time last week.

This week, gasoline inventories rose by 3.31 million barrels, more than compensating for last week’s 1.917-million-barrel decrease. According to the latest EIA data, gasoline inventories are now 3% below the five-year average for this time of year.

Distillate inventories increased by 1.22 million barrels this week, reversing last week’s 322,000-barrel decline. As of the week ending July 26, distillates were approximately 7% below the five-year average, based on the latest EIA data.

Cushing inventories also saw a build of 1.07 million barrels, according to API data, offsetting the previous week’s 929,000-barrel drop.

Crude oil technical analysis

The 3-wave correction from the July high to low, which spanned approximately -10%, was driven by demand concerns from China, overshadowing the typically positive seasonality of the U.S. driving season. However, momentum has shifted. Wednesday’s 4.3% increase marked the best trading day of the year and likely establishes Tuesday’s low (the July low) as a significant swing low. Additionally, daily trading volume reached its highest level in 30 days, indicating that bulls may have taken new positions rather than the move being driven solely by short covering.

The 1-hour chart reveals that the strong rally from the July low has only experienced a minor retracement, highlighting the move's strength. However, the market seems reluctant to break above the 79 level for now, with the weekly R1 pivot just above at 78.85 and the RSI (14) having been overbought for the past 12 hours.

With the US dollar index consolidating above its 200-day EMA, bulls may want to wait for a potential retracement before entering new long positions. Key support areas to watch for swing lows include the 77 – 77.50 zone, which encompasses the weekly pivot point, a high-volume node (HVN), and the 38.2% Fibonacci retracement level.

The oil market rebounds

With the VIX reaching historical highs, investors are now focusing on opportunities to buy the dips, anticipating a potential reversal following the recent sharp market declines.

The previous day's waning bearish momentum encountered a stronger-than-expected ISM Services PMI reading, which had recently been testing 2020 levels. This data supported a pause in the downward trend and facilitated a positive rebound in the market.

Calls for an emergency rate cut to prevent a potential recession in the US are garnering attention, adding further bearish pressure on the US dollar index. However, escalating tensions in the Middle East might enhance the dollar's role as a safe haven asset, potentially reversing its current trend and boosting its value alongside oil prices.

In addition to concerns about US economic growth, US crude oil inventories will be a focal point tomorrow, especially after reporting unexpectedly high declines throughout July.

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