Despite 9 straight weeks of inventory draws, WTI crude cracked below $73 as dollar strength, Fed rate hike fears, and Hormuz reopening hopes overwhelmed bullish supply data.
The crude sell-off deepened on Wednesday as WTI decisively broke below the key $73 support level, with a stronger U.S. dollar and mounting concerns over additional Federal Reserve rate hikes adding to the pressure. The breakdown came despite another sizable draw in U.S. crude inventories, underscoring how macroeconomic headwinds and easing supply concerns are currently outweighing bullish fundamentals.
Crude’s Contrarian Move
West Texas Intermediate (WTI) crude futures (CF) for August delivery was last seen trading down 3.75% at $70.47.
A weekly crude oil inventory report, which on any other day would have propped up prices, lacked potency to lift the sagging prices, which have been on a downward spiral since the middle of June.
The Energy Information Administration’s (EIA) weekly Petroleum Status report showed that U.S. commercial crude oil inventories, excluding those in the Strategic Petroleum Reserves (SPR) fell by 6.1 million barrels in the week ended June 19. To put things in perspective, the sharp drawdown left inventories about 7% below the five-year average for this time of the year. And this marked the ninth straight week of inventory depletion.
Crude Inventories Slide
Source: EIA
Why did oil prices go against the grain? The narrative currently is the weakening demand and the prospect of additional supply entering the market as the Strait of Hormuz reopens.
Cracks Emerge In Demand Story
The market's muted reaction to another large U.S. inventory draw suggests investors are increasingly skeptical about the strength of future oil consumption. The IEA has warned that global oil demand is weakening as higher prices and economic uncertainty curb fuel usage, while expectations of higher-for-longer interest rates threaten to further slow activity. As a result, traders appear more focused on demand destruction risks than on the current tightness in physical oil markets.
Supply Glut or Persistent Tightness?
Speaking at the Reuters Global Energy Forum, U.S. Energy Secretary Chris Wright said roughly 72 ships carrying 20 million barrels of oil crossed the Hormuz strait over the last 24 hours. He also reportedly said that Iran will no longer have leverage with respect to the strait and cannot shut it down.
ING Commodities Strategists Ewa Manthey and Warren Patterson, however, had a different tale to tell. In a note released on Wednesday, the strategists said the recent crude oil price movement suggests that the market expects a fairly rapid recovery in Persian Gulf oil supplies. That said, the strategists believe the oil sell-off is overdone, with the market tightening rapidly.
They pointed to estimates that showed roughly 6 million barrels per day (mb/d) to 7 mb/d flowed through the strait in recent days, far below the 20 mb/d prewar levels.
Geopolitics tensions brew on the other side of the globe, with Ukraine launching a drone strike on Gazprom’s Moscow refinery, setting off a massive explosion. ING’s Manthey and Patterson warned that Russia potentially banning diesel in the wake of the latest attacks could have a significant impact on the global markets as the country exports 900 barrels per day (b/d) of diesel. The country already has export restrictions in place for gasoline and jet fuel.
WTI breaks key support, putting $70 at risk
Wednesday's selloff has put the psychologically important $70 level squarely in focus. A decisive break below that threshold could open the door to a test of the $67.7-$68 support zone, effectively retracing the gap created during the early-March rally sparked by the U.S.-Iran conflict.
The moving-average ribbon continues to paint a bearish picture, with shorter-term averages trading below longer-term ones and price sitting beneath its 200-day moving average near $73.6. Any recovery attempt would first need to reclaim the $73-$74 zone, which has now shifted from support to resistance.
Source: TradingView
There is, however, one encouraging signal for bulls. The 14-day RSI has fallen to roughly 25, placing crude firmly in oversold territory. While oversold conditions do not guarantee a reversal, they often precede short-covering rallies and opportunistic buying. If such a rebound materializes, crude could initially target the 200-day moving average near $73.6, with the next major resistance level located around $79.
Positioning among futures traders show a bearish disposition, according to MarketFramework
The battle around $70 has become a referendum on the market's demand outlook. Inventory data continues to point to a tightening physical market, but futures traders are increasingly focused on what demand may look like several months from now. Whether crude can hold the $70 level may depend less on current supply conditions and more on upcoming economic data, including Friday's price consumption expenditure (PCE) inflation report and its implications for Fed policy.