Fears that More Aggressive U.S. Interest Rate Hikes Would Pressure Economic Growth

Recap:  The oil market on Wednesday extended its losses amid fears that more aggressive U.S. interest rate hikes would pressure economic growth. The Federal Reserve Chair reaffirmed his message of higher and potentially faster interest rate hikes but emphasized that debate was still underway with a decision depending on data to be issued before the U.S. central bank’s policy meeting in two weeks. The market posted a high of $77.73 in overnight trading before it continued to trade lower and retraced more than 62% of its move from a low of $73.80 to a high of $80.94, as it traded to $76.35 ahead of the release of the EIA weekly petroleum stock report. The crude market retraced some of its losses upon the release of the inventory report showing an unexpected draw of over 1.6 million barrels. It was the first draw in stocks following 10 weeks of builds. However, the market just as quickly sold off to a low of $76.11 as the inventory data pointed to weak demand. The market later retraced some of its losses and traded sideways during the remainder of the session. The April WTI contract settled in negative territory for the second consecutive session, down 92 cents at $76.66 while, the May Brent contract settled down 63 cents at $82.66. The product market also settled lower, with the heating oil market settling down 5.56 cents at $2.7419 and the RB market settling down 1.18 cents at $2.6889.

Technical Analysis:  The oil market is seen retracing its recent losses as it awaits the release of the February payrolls report on Friday and the release of the inflation report next week. The ADP private employment report released early on Wednesday showed a larger than expected increase in February, giving way for the Fed to possibly increase rates at a faster rate. The crude market is seen finding support at its low of $76.11, $75.83, $75.55, $75.22, $74.99 followed by $74.09, $73.83-$73.80 and $73.47. Resistance is seen at $77.25, its high of $77.73 followed by $78.15, $78.89, $80.24 and $80.94. More distant resistance is seen at $82.48 and $82.64.

Fundamental News:  The EIA reported that U.S. crude oil stocks fell by 1.694 million barrels in the week ending March 3rd to 478.5 million barrels. It is the first crude stock draw in 11 weeks. U.S. East Coast crude oil inventories fell by 400,000 barrels to a record low of 6.7 million barrels in the week ending March 3rd. The previous low was 6.71 million barrels in May 2021. Meanwhile, U.S. Gulf Coast crude oil stocks increased by 2.7 million barrels on the week to 269.9 million barrels, the highest level since May 2021. U.S. distillate stocks increased by 138,000 barrels to 122.3 million barrels, the highest level since January 2022.

U.S. Energy Secretary Jennifer Granholm said any further releases from the U.S. Strategic Petroleum Reserve would be due to disruptions like the war in Ukraine. She said "There has to be a situation like that that would generate interest in doing it. It's not just about increases in prices, it really is about an emergency disruption."

Barclays cut its 2023 oil price forecasts due in part to more resilient output from Russia than expected, and said the market could flip into a deficit in the second half of the year due to increasing demand in China. The bank cut its average forecasts for the Brent and WTI benchmarks by $6/barrel to $92/barrel and by $7/barrel to $87/barrel, respectively. It also forecast Brent would average $97/barrel and WTI would average $92/barrel next year. The analysts added that the market could flip into a deficit of 500,000 bpd in the second half of this year as China's reopening from pandemic restrictions "matures" and as supply growth from outside the OPEC+ producer group slows. The market is running a supply surplus of about 800,000 bpd currently. Barclays revised its 2023 demand estimate 150,000 bpd higher due in part to a somewhat improved growth outlook for the United States and Europe. It sees a 900,000 bpd increase in Chinese demand this year. It also forecast a 500,000 bpd decline in Russian output in the fourth quarter this year from last year’s level, down from a previous forecast of a 700,000 bpd decline.

Early Market Call - as of 8:45 AM EDT

WTI - April $77.04, up 37 cents

RBOB - April $2.7028, up 1.39 cents