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[The oil market had a strong end to the week following the extension of Saudi voluntary cuts earlier in the week. For this week, markets will be focused on U.S. CPI data on Wednesday, whilst specifically for the oil market, we have the IEA and OPEC oil market reports released later in the week.]

The oil market managed to pull off a second consecutive week of gains with ICE Brent settling almost 4.8% higher last week. Cuts from both Saudi Arabia and Russia have provided some support, although the market will have to continue to contend with macro uncertainty, which has capped the market over the last couple of months. The recent action taken by Saudi Arabia will likely provide some comfort to longs as it sends the signal that the Saudis are committed to putting a floor under the market. The latest positioning data shows that speculators increased their net long in ICE Brent by 25,106 lots over the last reporting week to 184,906 lots as of last Tuesday. This move was predominantly driven by fresh longs entering the market, with the gross long increasing by 16,881 lots. Meanwhile, for NYMEX WTI, speculators increased their net long by 23,820 lots to 95,363 lots. This was driven almost exclusively by short covering. At 112,155 lots, the gross short in WTI is still sizeable and so with the right catalyst, there is the potential for a short-covering rally.

Another factor which is providing some degree of support to the market is the refilling of the U.S. Strategic Petroleum Reserve (SPR). On Friday the Department of Energy (DoE) announced that it will be looking to purchase around 6MMbbls of U.S. sour crude oil for delivery in October/November. Up until now, the DoE has successfully tendered for 6.3MMbbls, with this volume set to be delivered in August and September. There had been reports that the DoE was looking to buy roughly 12MMbbls this year, and if we see the total volume awarded in the latest announcement, that would get us to this 12MMbbls already.

A large explosion at a Mexican platform, which was sadly deadly, saw Pemex reduce oil output by 700Mbbls/d. However, the bulk of these shut-ins appears to have been precautionary and 600Mbbls/d of this output has already returned, according to the company.

Drilling activity in the U.S. continues its decline with the latest data from Baker Hughes showing that the number of active U.S. oil rigs fell by five over the week to 540. This is the lowest number since early April 2022. The number of active oil rigs in the U.S. has fallen by 81 since the start of the year. Lower drilling activity suggests more limited supply growth. And this is a trend that we have seen in the EIA's U.S. crude oil supply forecasts with less than 200Mbbls/d of U.S. supply growth expected in 2024. The EIA will release its latest Short-Term Energy Outlook on Tuesday, which will include U.S. production forecasts for the remainder of 2023 and 2024.

In addition to the EIA's Short-Term Energy Outlook release on Tuesday, both OPEC and the IEA will release their latest monthly oil market reports on Thursday. Given the macro uncertainty, the market will likely be focused on any changes to demand forecasts in both reports. Away from energy markets, the big macro release this week will be U.S. CPI numbers on Wednesday, which will likely further shape market expectations on how much more monetary tightening we could see from the U.S. Federal Reserve in the months ahead.

Source: ING