The Oil Market Looked Ready to Post an Inside Trading Day But Instead Posted an Outside Trading Day

Recap:   Early on Friday, the oil market looked ready to post an inside trading day but instead posted an outside trading day following a volatile session. The market traded sideways in overnight trading as it held support at its previous low of $74.97. However, the market rallied over $2 and posted a high of $78.00 after it breached its previous high of $77.24 and retraced little more than 38% of its move from a low of $74.97 to a high of $82.48. The market was supported by the U.S. jobs report showing a sharp increase in job growth in January of 517,000 jobs and an upward revision of 37,000 jobs to show 260,000 jobs were added in December. The market, however quickly pared its gains and sold off sharply, breaching its downward trending support line ahead of the imminent EU embargo on Russian refined products. The oil market continued to trend lower ahead of the close, posting a low of $73.17. The March WTI contract settled down $2.49 at $73.39 and the April Brent contract settled down $2.23 at $79.94. The March WTI contract continued to trend lower in post-settlement trading and posted a low of $73.13. Meanwhile, the product markets ended sharply lower, with the heating oil market settling down 12.14 cents at $2.7753 and the RB market settling down 13.13 cents at $2.3210.

Technical Analysis: The oil market on Monday is seen retracing some of Friday’s sharp losses and trade within its recent trading range as the market will look for further direction from the impact of the EU embargo on Russia’s refined oil products, which takes effect on Sunday. The market is seen finding support at its low of $73.13, $72.88 and $72.74. Meanwhile, resistance is seen at $74.50, $75.00, $75.57, $76.14, $76.70, $76.98 and its high of $78.00. More distant upside is seen at $77.81 and $78.91, its 50% and 62% retracement level, respectively, off a low of $73.13 and a high of $82.48.

Fundamental News:  The Swedish presidency of the European Union said EU countries have agreed on a European Commission proposal to set price caps on Russian oil products. EU diplomats said the price caps agreed by ambassadors are $100/barrel on premium oil products such as diesel and a $45/barrel cap on discounted products such as fuel oil. The proposal is that they apply starting February 5th. The price cap, together with an EU ban on Russian oil product imports are part of a broader agreement among G7 countries.

The Kremlin’s spokesman, Dmitry Peskov, said an EU embargo on Russia's refined oil products that will come into force on Sunday would further unbalance global energy markets.

Data from traders and Refinitiv showed that Russia plans to increase its diesel exports in February in an attempt to cope with a European Union embargo, price cap and lack of tankers. Despite the expected restrictive measures, total exports of low sulfur diesel and gas oil from the Russian Black Sea and Baltic ports are expected to increase in February by 5% to 10% month-on-month to 4.2 million to 4.3 million tons.

DBS Bank in a research note to clients warned the upcoming European Union ban on Russian refined oil products could leave Russia with more crude to export as it becomes a logistical challenge for Russia to find markets for its oil products exports. It noted that the alternative buyers for Russian oil like China and India, have plenty of their own refining capacity and are exporters of fuel products currently as well as there is a limited number of product tankers available. As a result the bank said Russia may need to cut its crude production by 5%-10%.

Baker Hughes reported that the oil and gas rig count in the week ending February 3rd fell by 12 to 759, the lowest level since September. U.S. oil rigs fell by 10 to 599 this week, the lowest level since September, while gas rigs fell by 2 to 158.

IIR Energy said U.S. oil refiners are expected to shut in 1,711,000 bpd of capacity in the week ending February 3rd, cutting available refining capacity by 19,000 bpd.

Early Market Call - as of 8:30 AM EDT

WTI - March $74.33, up 94 cents

RBOB - March $2.3451, up 2.41 cents