Oil Market Surges on Unexpected Drop in Crude Stocks and Decline in U.S. Production

Recap: The oil market traded higher on Wednesday following a larger than expected draw in crude stocks and fall in U.S. crude output. The geopolitical tensions in the Middle East also continued to support the oil market. The oil market traded higher in overnight trading as it traded back towards the $75.00 level on news that China’s central bank will cut the amount of cash banks must hold as reserves from February 5th, a move that is expected to support the economy. The market erased some of its gains and posted a low of $74.27 ahead of the release of the EIA’s weekly petroleum stocks report. However, the market later bounced off its low and breached its previous highs as it rallied to a high of $75.83 in light of a the larger than expected draw in crude stocks of over 9 million barrels on the week, compared with market expectations of a 2.2 million barrel draw. The EIA also reported that U.S. oil output fell from 13.3 million bpd two weeks ago to a five-month low of 12.3 million bpd last week after oil wells froze due to an Arctic freeze. The crude market later gave up some of its sharp gains ahead of the close. The March WTI contract settled up 72 cents at $75.09 and the March Brent contract settled up 49 cents at $80.04. The product markets ended the session in negative territory, with the heating oil market settling down 95 points at $2.6818 and the RB market settling down 6 points at $2.2095.

Technical Analysis: The crude market on Thursday is likely to trend sideways as it retraces some of today’s gains before it continues to trend higher on the supportive inventory reports and ongoing tension in the Middle East, with the U.S. conducting strikes against Iran-supported militants in Iraq after the group attacked American troops for a second time. The oil market is seen finding resistance at its high of $75.83, $76.31, $76.71 and $79.56. Meanwhile, support is seen at $73.94, $73.41, $72.56 and $72.10. Further support is seen at $70.62, $70.25 and $69.56.

Fundamental News The EIA reported that crude inventories fell by 9.2 million barrels to 420.7 million barrels in the week ending January 19th. The draw was driven by a decline in U.S. crude imports of 1.2 million bpd as the winter weather shut in refineries and kept motorists off the road. The winter storms also caused a 1 million bpd drop in crude production to 12.3 million bpd, the largest decline since September 2021. Refinery crude runs fell by 1.4 million bpd to 15.3 million bpd and refinery utilization rates fell by 7.1% to 85.5% of total capacity, the largest decline since December 2022 during Winter Storm Elliot. U.S. gasoline stocks increased by 4.912 million barrels to 253 million barrels, the highest level since February 2021. U.S. Midwest gasoline stocks increased by 1.3 million barrels to 59.8 million barrels, the highest level since March 2022. The EIA also reported that the four week average for distillate product supplied in the U.S. fell last week to the lowest level since June 2020. The four week average fell to 3.38 million bpd.

HSBC Global Research sees Brent crude prices remaining rangebound at $75/barrel to $85/barrel in the medium term as analysts expect the spare capacity to offset any impact of geopolitical risks. HSBC analysts said the "above average" spare production capacity held by OPEC and allies will dampen the impact of Red Sea disruption and increasing geopolitical risks. The analysts said OPEC+'s spare production capacity of 4.5 million bpd at the end of 2024, which was up from 4.3 million bpd at the end of 2023, should help dampen price spikes. HSBC analysts forecast oil demand growth of 1.3% in 2024 over a year earlier, further slowing to 0.9% in 2025.

According to industry sources and LSEG data, Russia’s Novatek resumed fuel loadings at its Baltic Sea Ust-Luga terminal, damaged in a suspected drone attack. It is drawing on stockpiles to resume fuel loadings. According to the data, Minerva Julie and Chrystal Arctic tankers are currently being loaded with fuel. Operations at the processing complex have not yet resumed. Analysts have said it would take weeks for the complex to restore full-scale operations.

Early Market Call – as of 9:20 AM EDT

WTI – March $76.42, up $1.33

RBOB – February $2.2405, up 3.1 cents

HO – February $2.7471, up 6.53 cents

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