Weekly Crude Oil Inventories Report
Crude Prices Surge Among Crude Stocks Drawdown, Saudi Arabian Production Cut & US/China Trade Talk Optimism
Crude oil prices soared higher this week as a combination of factors boosted prices. Having fallen by around 40% since the high levels seen in 2018, crude oil has come under increasing attention with many market players voicing their concerns over the potential for an extended collapse similar to what was seen in 2014.
The latest industry data released by the energy information administration showed that US crude oil inventories fell again in the week up to Jan 4th, marking the third consecutive week of declines. The EIA report showed that crude stocks were down 1.7 million barrels over the week, though this figure was below the forecast 2.8 million barrel decline that the market was looking for.
Huge Rise in Distillate & Gasoline Inventories
However, the breakdown of the data wasn’t all positive as distillate inventories, which include diesel and heating oil, were seen building by 10.6 million barrels over the same period. This figure was over five times the 1.9 million barrel surplus that the market had forecast.
Gasoline inventories were also higher over the week rising by 8.1 million barrels, the largest weekly increase since December 2016, again well above the market’s estimate of a 3.4 million barrel increase.
The combination of a smaller than expected decline in crude oil stocks as well as a dramatic increase in refinery products makes for a bearish report. Overall, however, the market seems happy to focus on yet a further drawdown in stocks.
Saudi Arabia Slashes Output
The general improvement in the landscape for the energy sector is what is creating the room for optimism here. Saudi Arabian energy minister Khalid al-Falih told the market on Wednesday that the Kingdom, which is in the top three largest oil producers globally, is on course to meet its target of slashing output by around 900k barrels per day to 10.2 million barrels per day over January.
These comments have boosted optimism in the planned OPEC cuts which are to start this month. The cut will see oil production reduced by around 1.2 million barrels per day among OPEC and a group of allied nations led by Russia. Al-Falih told reporters that he feels production cuts will work effectively to balance the market and also added that further action could be taken if supply once again starts to outstrip demand.
US/China Trade Talks Boosting Sentiment
Oil prices have also been bolstered by a second round of trade talks between the US and China which got underway in Beijing this week. While the market is waiting for details on how the talks progressed, there is a palpable sense of relief among investors visible across equity and commodity markets.
Concerns over a slowdown in China, the worlds largest importer of oil, due to the negative impact of the trade war, have been weighing on oil prices and signs of a potential deal between the US and China are sparking a relief rally. The progress of these talks will be closely monitored due to Trump’s warning that should the talks fail to produce a deal, US tariffs on Chinese goods will rise to 25% from the current 10% which would weigh heavily on oil prices due to the damage to the Chinese economy.
After hitting the 2017 low, and the completion of the large ABCD pattern, the rally in oil prices continues, and price is now fast approaching the 55.31 level which was a key resistance level over 2016 and 2017 and will now be a key near term pivot for price. Above this level, focus will be on further upside with a retest of the broken bullish channel base as the next key level to watch.