Oil Markets Navigate Narrow Trading Range Despite Red Sea Shipping Disruptions

Recap: The oil market traded higher but posted an inside trading day as it failed to breach Monday’s $3.60 trading range. While the attacks by Yemen’s Houthi rebels on vessels traveling through the Red Sea have impacted shipping and increased the geopolitical risk premium, it has not affected output, which has limited the market’s gains. The market traded lower after the U.S. announced the creation of a task force to safeguard Red Sea commerce from attacks by the militants. The crude market posted a low of $71.85 in overnight trading. However, the market bounced higher and traded towards its previous high as the Houthi militants vowed to defy the U.S.-led navel mission. The market was also supported ahead of the January contract’s expiration at the close. The oil market rallied to a high of $74.01 in afternoon trading before it retraced some of its gains ahead of the close. The January WTI contract expired up 97 cents at $73.44 and the February contract settled up $1.12 at $73.94. The February Brent contract settled up $1.28 at $79.23. Meanwhile, the product markets ended the session higher, with the heating oil market settling up 4.4 cents at $2.7168 and the RB market settling up 4.18 cents at $2.2008.

Technical Analysis While the crude market has traded higher, it remains in its downward trend channel. It is likely to test its previous high as the weekly petroleum stock reports are expected to show draws in crude stocks. The market will also remain supported amid the concerns over the escalating attacks on vessels traversing the Red Sea. The February WTI contract is seen finding resistance at its high of $74.44, $74.61, $75.20 and $76.17. Meanwhile, support is seen at $72.14, $71.85, $70.99, $70.64, $69.82 and $67.98.

Fundamental News:  U.S. Defense Secretary Lloyd Austin invited dozens of nations to take steps to address Houthi attacks on Red Sea shipping as he spoke at a defense ministerial meeting to tout a new military operation to secure commerce in the waterway. Earlier on Tuesday, he announced the launch of the U.S.-led Operation Prosperity Guardian, which will include joint patrols of Red Sea shipping. The U.S. Defense Secretary said participating countries include the United Kingdom, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles and Spain.

Kremlin spokesman, Dmitry Peskov, said that Russia was not taking part in the US-led operation aimed at ensuring security in the Red Sea.

Yemen's Iran-aligned Houthis said they would press on with attacks in the Red Sea, and could mount a naval operation there roughly every 12 hours. A member of the Supreme Yemeni Political Council, Mohammed Ali al-Houthi, said any country that moves against Yemen will have its ships targeted in the Red Sea.

Russia’s Deputy Prime Minister, Alexander Novak, said there was no need for immediate action from the OPEC+ group of leading oil producers, as oil prices were rising and the market was balancing out.

Barclays PLC reported that its 39th annual global spending survey found that private oil and gas shale drillers are set to cut their spending budgets by 4% to average $34.4 billion in 2024. This follows a year in which private drillers reportedly had increased their expenditures by 15% in 2023. Barclays estimates these private producers account for roughly half of the U.S. drilling rigs and as much as 40% of the country’s onshore production. This report follows a recent survey by Evercore ISI that estimated a 2% budget increase by U.S. oil producers next year as crude production is seen as only increasing by 150,000 b/d, a fraction of this year’s 1 million b/d growth.

IIR Energy reported that U.S. oil refiners are seen operating at full capacity in the week ending December 22nd, keeping refining capacity unchanged from the previous week.

Early Market Call – as of 8:40 AM EDT

WTI – February $75.02, up $1.08

RBOB – January $2.2083, up 75 points

HO – January $2.7558, up 3.9 cents

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