WTI 15% Higher Since May Low

Crude prices reached a 2 ½ year low at the beginning of May as the debate over a recession rages on. The latest announcements from the US government might have put a floor on the most recent price swings as crude trades nearly 15% above the multiyear low. Any other catalysts?

US Government to Start SPR Replenishment

When the Biden administration opted to start selling from the Strategic Petroleum Reserve (SPR) as the effects of sanctions on Russia over the war in Ukraine pushed prices higher, the US government said it would start buying back crude to replenish the reserves once prices fell to $70/bbl. Last month, prices fell to that level, but there was no move by the government. The initial position was that repurchases would happen sometime before the end of the year after maintenance on the storage tanks was completed. After more price fluctuations, the Secretary of Energy, Jennifer Granholm, confirmed that the government would start replenishing the SPR by buying 3M bbl in June for delivery in August. It should be noted, however, that the SPR continues to release crude despite the call for bids to replenish it.

Since the start of the war, the SPR has released around 222M bbl, or over a third of the total capacity, leaving it with 363M bbl as of last week. 3 M bbl a month would be a painstaking pace to replace the reserve and is relatively minor compared to the 20M bbl/day consumed by the US. However, it does send a signal about prices and opens speculation that the pace of buying could be ramped up in the coming months if prices stay at or again fall below $70/bbl.

The Latest Catalysts Support Further Upside

On Wednesday, the EIA released its weekly inventories showing a surprise build in inventories to 5.0M bbl compared to a drawdown of 1M expected. This was on top of the 3M build reported last week. However, the SPR released 2.4M bbl in the same week, meaning the build was just 2.6M bbl on balance.

Run rates in refineries were still over 90%, suggesting there is continued high demand. With Memorial Day weekend coming up, it's normal for inventories to grow ahead of the anticipated demand. Optimism over a potential resolution of the debt ceiling issue was seen as a larger driver of the gain in oil prices than the changes in inventories. In particular, the IEA predicted that oil demand would outpace supply by about 2M bbl later in the year, on the expectation that China demand will keep rising. In fact, the IEA expects China to account for 60% of the increase in demand this year.

WTI Higher After Rising Pennant

WTI prices rose past the descending upper trendline connecting the peaks of 73.90 and 71.80, putting a rising pennant in with the throughs of 69.40 and 70. The length of the upward leg off 63.60 implies a potential continuation could see crude targeting 81.70, which is the height of the initial legal, added to the breakout point.

The bulls must take control of 73.90, break past 76.70 and reclaim the 80 handle to successfully complete the pennant extension. Any hurdle to the upside might change the course. Conversely, if bulls lose the support at the round level of 70, the pennant might receive invalidation should prices slide below 69.40, but a flag might be what could replace it.

Source: SpreadX LIGHT CRUDE

Key Takeaways

Crude prices have risen nearly 15% since reaching a 2 ½ year low in early May, and the US governments decision to start replenishing the SPR has provided support for further upside. Although the pace of buying is slow compared to the amount consumed by the US, it does send a signal about prices, with speculation that the pace could be ramped up if prices remain at or fall below $70/bbl. Despite a surprise build in inventories, continued high demand and optimism over resolving the debt ceiling issue are driving this rise further. The IEA expects oil demand to outpace supply by about 2 million barrels later in the year, mainly due to rising China demand.