Oil futures are showing signs of recovery on Thursday after experiencing a three-day decline that pushed the U.S. benchmark to its lowest closing level in almost a month.

Price Action

  • West Texas Intermediate (WTI) crude for October delivery is up by 27 cents, or 0.3%, at $79.16 per barrel. This follows the Wednesday session that saw the front-month contract hitting its lowest level since July 26.
  • October Brent crude, the global benchmark, has risen by 29 cents, or 0.4%, reaching $83.50 per barrel on ICE Futures Europe. It closed at its lowest level since August 2 on Wednesday.

Market Drivers

Following a strong summer rally fueled by growing confidence in the global economic outlook and OPEC+ supply cuts, the crude market has experienced setbacks in August.

These setbacks are primarily attributed to concerns about China's economic outlook, further amplified by issues in the country's property sector. Weakened purchasing managers index readings from Japan, the eurozone, and the U.S. on Wednesday have also contributed to economic worries, according to analysts.

Despite these challenges, the physical market remains tight, indicating strong demand, as noted by Michael Tran, global energy strategist at RBC Capital Markets.

Global Refinery Runs and Refined Product Inventories

Global refinery runs have been experiencing a year-over-year increase of approximately 2.2 million barrels per day. At the same time, major regions such as China, the U.S., and Europe are witnessing a struggle to build up their refined product inventories. This indicates that the demand for these products is stronger than previously anticipated. The strength of this demand can be seen in regional crack spreads, which measure the price difference between a barrel of crude oil and the refined products extracted from it.

Fundamentals and Market Outlook

In terms of market fundamentals, there is a continued tightness that persists, especially as Saudi Arabia remains committed to output cuts. However, recent price trends have shown signs of fading, which is expected within a risk allocation framework. Despite this, Tran notes that markets are still expected to remain tight due to recent firm price action.

RBC's Expectations for Crude Pricing and Product Demand

RBC's outlook for crude pricing suggests a consolidation within a tighter band compared to earlier this year. This consolidation is expected to revolve around $80 per barrel for West Texas Intermediate (WTI) crude oil. However, RBC acknowledges that a catalyst could potentially push prices out of this range. RBC maintains a bias towards higher prices given the complex's dependency on product demand, which has shown little indication of slowing down.

Potential Impact of Easing Sanctions on Venezuela's Oil Exports

On the supply front, there are reports that U.S. officials are considering a proposal to ease sanctions on Venezuela's oil exports. This proposal would be contingent upon the country taking steps towards holding a free and fair presidential election.

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