WTI Little Moved After Large Inventory Drawdowns

August has been particularly volatile for crude, as bad news from China partially offset falling inventories in the US. WTI soared over 15% in July but only 3% in August; where can it go from here?

The Unusual US Situation

August started with unusual news as the US Energy Information Administration (EIA) confirmed the largest drawdown in inventories since records began in 1982. Inventories had already been drawn heavily in July, with the end of August showing another 10.6M bbls drawdown, giving that 2% + boost to end the month barely positively. The US was expected to start rebuilding its Strategic Petroleum Reserve (SPR) this month but has hardly added a million barrels. What's going on?

US exports have increased marginally, but not enough to explain the drawdowns in inventories of that magnitude. The average price of gasoline has also remained relatively stable for months. It appears US refineries have increased their runs, processing the highest amount of crude into gasoline and diesel since early 2020, before the pandemic began. This suggests that US drivers are finally back to pre-pandemic habits and demand. International crude prices have bounced around but have not risen to prices seen last year when the fuel cost dampened US drivers' travel plans.

The China Factor

However, recent economic challenges in China have been weighing on the price of crude. The Asian giant is the largest oil importer, and the latest figures show that its imports have fallen to the lowest level this year. That is more than the prior year, but the 2.6M bbl/day drop from the previous month more than offset the 1M bbl/day production curtailment announced by Saudi Arabia for August.

Moreover, China's August PMI remained in contraction, according to its National Bureau of Statistics, with factory output declining. Much of China's crude demand will be transformed into industrial diesel. When crude prices were lower earlier in the year, China bought to build its stockpiles. But with prices popping above $80/bbl, buying to build inventory isn't as appealing, and Chinese imports have fallen off. Still, economists are optimistic about the future of crude prices, balancing the expected slower growth in China with reduced concerns that the West will experience a recession this year. Most analysts also believe that Saudi Arabia will extend its oil production cuts once more when OPEC+ meets again next week.

WTI in Impulse Pattern

Above $75 a barrel, WTI remains in an upside impulse pattern pending one more leg up, especially following the completion of a second correction: a flag. Gaining control of the $85 barrier could inspire additional bets towards the measured-move target past $92 should $90 gives way to bulls, with an interim resistance near $87.50. Conversely, failing to get through on a potential double-top formation would open the door to the flag low at $77.50/bbl wide again if bulls lost $80, with chances of invalidating the impulse increased.

Source: SpreadEx WTI Crude Oil

Key Takeaways

WTI experienced volatility in August with mixed news from China and falling inventories in the US. US refineries increased their runs, indicating a return to pre-pandemic demand levels for gasoline and diesel. However, economic challenges in China, the largest importer of crude, have taken their toll. This year, China's imports fell to the lowest level, partly due to declining factory output and reduced appeal of building inventory at higher prices. Despite this, analysts remain optimistic about crude prices, expecting slower growth in China but eased concerns of a recession in the West. Additionally, most analysts believe that Saudi Arabia will extend oil production cuts at the next OPEC+ meeting.