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Oil prices and stocks are showing great momentum, outperforming major indices yesterday and very likely this morning. The elements underpinning this strength are a recent report that China is willing to shorten quarantine time for inbound visitors, improving growth prospects and news that Macron apparently warned Biden that neither Saudi Arabi nor the UAE can ramp up oil output. Oil stocks (XOP) rose nearly 5% yesterday and are set to head higher today as oil prices continue their upward move.

Oil plunged for the second time in a few days on concerns that a global economic slowdown will ultimately hobble demand. West Texas Intermediate tumbled toward USD103 a barrel, crossing the first important support level (50 EMA). Will buyers jump in as prices approach the 100 EMA? Demand for oil is still super hot. Super major Exxon Mobil warned this week that crude markets may remain tight for years, while Vitol Group, the world’s largest independent oil trader, flagged rising fuel demand in China. Moreover, soaring margins are offering refineries an incentive to buy every barrel of crude they can get. 

US President Biden called on US oil refining companies to increase production to alleviate the burden of higher oil prices on consumers. Companies must take action to increase the availability of gasoline, diesel, and other refined products. The average gallon of gas in the US is 54 cents more expensive than a month ago. Biden said the White House is prepared to use all reasonable tools and emergency authorities to increase refinery capacity and output. Crude oil WTI prices dropped on the news, before recovering as supply remains tight and the post-Covid re-opening (including China) supports a strong demand. Later today we will have crude oil inventories data.

Oil prices are now just near the peak reached in the spring, and the macro backdrop indicates it may not take long before we brake above. The start of the US holiday driving season this weekend,  the risk of further sanctions on Russian output, declining spare capacity in the OPEC+ coalition, and a squeeze on refining capacity following years of plant closures are all in favor of higher oil prices. And in the meantime, the US is going into the peak period for gasoline with stockpiles at the lowest seasonal level since 2014.
*OPEC+ members are expected to meet this Wednesday.

Gold (+0.9%) is back on a positive momentum after hitting its 1'875 support line. The improvement in sentiment is also a reflection of a rebound in inflation expectations which are now back at 2.98%.  Similarly, other commodities also got a boost from improved risk appetite after China promised to scale up economic stimulus.