Oil Prices Under Pressure As Crude Inventories Rise

U.S. West Texas Intermediate crude oil futures are under pressure on Friday, amid an unexpected rise in U.S. crude and fuel inventories, according to a government report released the previous session. Profit-taking ahead of the week-end and next week’s Fed meeting are also being blamed for the weakness.

Furthermore, we’re likely seeing some hedge fund selling due to margin calls being triggered by the steep sell-off in the U.S. equity markets.

EIA Reports First US Crude Build Since November, Gasoline Inventories Hit 11-Month High

U.S. crude oil stockpiles rose last week for the first time since November while gasoline inventories grew to an 11-month high, the Energy Information Administration (EIA) said on Thursday.

Crude inventories rose by 515,000 barrels in the week to January 14 to 413.8 million barrels, compared with analysts’ expectations in a Reuters poll for a 938,000-barrel drop.

Refinery crude runs fell by 120,000 bpd to 15.45 million bpd and utilization rates fell 0.3 percentage points to 88.1% of total capacity last week, the EIA said. Additionally, net U.S. crude imports rose last week by 21,000 bpd, data showed.

U.S. gasoline stocks rose by 5.9 million barrels in the week to 246.6 million barrels, the EIA said, compared with expectations for a 2.6 million-barrel rise.

Distillate stockpiles, which include diesel and heating oil, fell by 1.4 million barrels last week to 128 million barrels.

Finally, stocks at the Cushing, Oklahoma, delivery hub for U.S. crude futures, fell by 1.3 million barrels in the last week, the EIA said.

Supply Issues Carry Prices Higher

Supply issues drove U.S. West Texas Intermediate and international-benchmark Brent crude oil futures higher early in the week. Prices were underpinned by an already tight supply outlook amid troubling geopolitical issues in Russia and the United Arab Emirates (UAE). Traders responded to an outage on a pipeline from Iraq to Turkey.

Prices Setting Up to Challenge $100

U.S. WTI and Brent crude oil futures appear to be poised to challenge $100 per barrel sometime this year, with or without the current supply issues. This is because there is a sizable supply deficit and the impact of the Omicron coronavirus variant on demand is far smaller than predicted.

This notion is supported by analysts at Goldman Sachs who said on Tuesday supply remains in a “surprisingly large deficit”.

Analysts also wrote that the hit to demand from Omicron will likely be offset by gas-to-oil substitution, increased supply distributions, OPEC+ shortfalls, and disappointing production in Brazil and Norway.

Goldman analysts said global oil demand is seen rising 3.5 million barrels per day (bpd) year-on-year in 2022, with fourth-quarter demand reaching 101.6 million bpd.

Goldman expects QECD inventories to fall to their lowest level since 2000 by summer, and OPEC+ spare capacity to decline to historically low levels, given the lack of drilling in core-OPEC and Russia struggling to ramp up production.

“We expect the increase in OPEC+ production to fall even further short of quotas in 2022, with an only 2.5 million bpd increase in production expected from the next nine hikes.”

Furthermore, higher prices will allow OPEC to fall behind its monthly ramp up path slightly in order to preserve spare capacity, with the acceleration in shale production growth providing necessary inventory buffer, Goldman added.

Weekly Technical Analysis

Weekly March WTI Crude Oil

Trend Indicator Analysis        

The main trend is up according to the weekly swing chart. The uptrend was reaffirmed this week when buyers took out $83.79, hitting a new contract high in the process.  A move through $62.05 will change the main trend to down.

The minor trend is up. It changed to up the week-ending December 24 when buyers took out the minor top at $72.82. This shifted momentum to the upside. A trade through $65.93 will change the minor trend to down.  

Retracement Level Analysis

The market is currently trading on the strong side of a minor 50% level at $76.52 and the main 50% level at $74.58, making both of these levels support.

Weekly Technical Forecast

The direction of the March WTI crude oil market the week-ending January 28 will be determined by trader reaction to $83.30.

Bullish Scenario

A sustained move over $83.30 will indicate the presence of buyers. If this move is able to continue to generate enough upside momentum then look for a short-term test of $87.10 - $88.18. Taking out $88.18 could trigger a possible surge into $92.38 over the near-term.

Bearish Scenario

The inability to sustain a rally over $83.30 will indicate the presence of sellers. It won’t be a particularly bearish signal, but it may mean that buyers view the market as overvalued at current price levels. This would encourage longs to take profits. This could drive the market into a value zone or $76.52 - $74.58 where new buyers would likely re-emerge.

Short-Term Outlook

The price action late in the week suggests traders have become considered about value, meaning the market is overpriced. This could encourage profit-taking.

If it continues next week then we’re likely to see a pullback into the former top at $80.72. Buyers are likely to come in on the first test of this level.

Breaking $80.72 will be a sign of weakness. It will also mean that those traders who bought the breakout over this level during the week-ending January 14 are holding losing positions.

If these longs get spooked enough by some news then they could start liquidating their positions. If the selling gets ugly then look for the move to extend all the way back to $76.52 - $74.58. We expect to see strong buying on a pullback into this zone.

Although there are predictions calling for $100 per barrel crude, the fine print says this will likely occur during the second half of the year. Therefore, any rallies through $88.18 and up to $92.38 at this time of year will likely be met with new short-selling.

Fundamentally, all eyes are likely to be on the Federal Reserve’s monetary policy announcements on January 26 and the Russian-Ukraine situation.

Traders should also keep an eye on the stock market. If it continues to weaken, we may start to see margin call selling in crude oil, which will put additional pressure on prices.