An Unexpected Increase in Crude Stocks Weighed on the Market

Recap:  On Thursday, the oil market extended its losses seen on Wednesday as an unexpected increase in crude stocks weighed on the market along with concerns over possible recession following U.S. retail sales and output data. The crude market opened lower and continued to trend lower, posting a low of $78.13 in overnight trading following the release of the API report on Wednesday evening. The report showed a large build in crude stocks of over 7 million barrels on the week. However, the market bounced off that level and retraced some of its losses, ahead of the release of the EIA petroleum stock report. The market was supported by the IEA head, Fatih Birol, stating that energy markets could be tighter in 2023. The crude market continued to trend higher following the release of the EIA report, despite it also showing an unexpected build in crude stocks of over 8.4 million barrels on the week. The oil market rallied to a high of $81.18 in afternoon trading before it erased some of its gains and settled in a sideways trading range ahead of the close. The February WTI contract settled up 85 cents at $80.33, the highest level since December 1st, while the March Brent contract settled up $1.18 at $86.16. The product markets ended the session sharply higher, with the heating oil market settling up 11.29 cents at $3.3759 and the RBOB market settling up 7.33 cents at $2.5968.

Technical Analysis: The crude market on Friday will likely retrace some of its gains before it continues on its upward trend ahead of the February contract’s expiration at the close. The market which seems to have dismissed the large build in stocks will continue to focus on expected increase in Chinese oil demand. However, as we previously stated it should be noted that while China’s reopening will increase demand, the country’s increase in travel for the Lunar New Year this weekend may be accompanied by an increase in Covid cases and thus impact demand. Technically, the market is seen finding support at $79.36, $78.74, its low of $78.13 followed by $77.52 and $77.10-77.06. Meanwhile, resistance is seen at its high of $81.18 and $81.91, its 50% retracement level off a low of $70.08 and a high of $93.74. More distant upside is seen $82.38, $82.74, $83.34 and $84.70, its 62% retracement level.

Fundamental News:  International Energy Agency Executive Director, Fatih Birol, said that energy markets could be tighter in 2023, adding that he hoped prices would not rise further in order to ease the pressure on energy-importing developing countries. Two Gulf OPEC+ producers, UAE energy minister Suhail al-Mazrouei and Saudi Aramco chief Amin Nasser, have said this week they see oil markets as balanced. On the sidelines of the World Economic Forum annual meeting in Davos, the head of the IEA said that even though currently there was no tightness in the market, there were uncertainties to watch out for, namely Chinese demand and Russian supply.

Bloomberg reported that the Biden administration is inclined to oppose any move to lower the price cap on exports of Russian crude oil, despite a push by some European countries to squeeze Moscow’s revenues even more. Russia’s flagship oil Urals is trading far below international prices and the G7’s $60/barrel cap that came into effect on December 5th. The European Union agreed to review the price cap every two months, starting in mid-January, with an aim to keep the threshold at least 5% below the average market price. 

A nationwide strike against pension reform in France led to a substantial fall in electricity output and halted deliveries from refineries operated by TotalEnergies on Thursday. Deliveries of refined oil products were blocked from leaving refineries operated by TotalEnergies. TotalEnergies said there would be no disruption to fuel supplies at service stations if the unions maintain their strike timetable.  Meanwhile, a CGT union representative said product delivery sendouts are blocked at Esso France's Fos-sur-Mer site in the south amid nationwide strikes in the country.

Early Market Call - as of 8:05 AM EDT

WTI - February $80.88, up 55 cents

RBOB - February $2.6306, up 3.38 cents