No Action in US/Iran Conflict Reduces Market Risk Premium

Oil – Fundamental Analysis

With little progress being made in the US/Iran talks and, with no military action by either side, traders reduced the market risk premium this week with a “wait-and-see” attitude. An unexpectedly large gain in crude inventory and an increase in gasoline stocks provided bearish momentum for prices to move lower. US prices still remained above the key $60/bl. level. WTI had a High of $65.85/bl. on Wednesday with a weekly Low of $61.15 on Friday. Brent crude’s High was $70.70/bl. on Wednesday while its Low was $66.90 Friday. Both grades settled lower week-on-week. The WTI/Brent spread has widened to ($4.90) on the earlier week rally. Look for this to tighten next week.

 US/Iran talks are scheduled to continue which lends an optimistic tone however, a 2^nd US aircraft carrier is reported to be heading into the Middle East, a move that could add risk premium back into oil markets. US-flagged ships were told to avoid Iranian waters when  traversing the Strait of Hormuz. Israeli PM Netanyahu visited the White House this week to present his countries demands for limitations on Iran’s uranium enrichment and its backing of rebel groups like Hamas and Hezbollah.

 With near-term concerns regarding supply disruption abating, the market has returned to a focus on over supply. The IEA in Paris has lowered its forecast for global crude demand for this year while stating that global inventories last year grew at their strongest pace since 2020. On the other hand, the OPEC+ group output for January fell by -440k bld.

 As part of a wider trade deal, India has agreed to halt its purchases of Russian crude. In return, the US will slash the tariffs on imports from India from the punitive 50% back down to the 18% level.

 US E&P companies such as Continental Resources and EOG Resources are looking to take hydro-fracturing technologies to countries like Argentina, Turkey, Australia and the U.A.E. as some industry analysts have indicated a 15% decline in productivity in the Permian Basin since 2020. India’s total imports of Urals has already dropped to 435k bld. last month from prior months at 1.5 million. The ultimate US goal is to lessen Russia’s largest source of revenue which is funding the Ukraine war.

 The Energy Information Administration’s Weekly Petroleum Status Report indicated that commercial crude oil inventories for last week increased +8.5 million bl. to a total of 429 bl. million and -3% below the 5-year average. The API forecasted a +13.4 million bl. gain while market analysts forecasted a -400k drop. US refinery utilization was 89.4% down from 90.5% last week representing -50k bld. to 16.0 million bld. Gasoline demand was -600k bld. to 8.2 million bld. Total motor gasoline stocks increased +1.2 million bl. to 259 million bl. and are now +4% above the 5-year average. Distillates were -2.7 million bl. at 127.4 million bl. and are now at -4% below the 5-year average. Inventory at the key Cushing, OK hub changed +1.1 million Bbl. to 25 million Bbl. or 32% of capacity. The SPR held at 415 million bbl. Imports of crude oil were +600k bpd. to 6.8 million Bbld. vs. 6.2 the prior week while exports were 3.7 million bpd. vs. 4.0 the prior week. Exports of petroleum products were 6.7 million bpd. last week vs. 7.3 the prior week. Total US oil production was 13.7 million bld. last week vs. 13.5 last year at this time. Total US active rigs held at 551 vs. 588 last year with -3 oil, +3 in gas.

 AAA’s average US retail gasoline prices continue to rise slightly at the pump and were most recently reported at $2.99/gal., +$0.04/gal. vs. last week, +$0.12/gal. from last month and -$0.22/gal. less than a year ago.

 There were several positive signs for the economy this week. Consumer prices rose +2.4% last month vs. January 2025, an 8^th-month Low and down from December’s +2.7% Forecasters had expected a similar number to December. Lower gasoline prices helped while food costs continued to rise. The US economy added +130k jobs last month representing the strongest growth in more than a year. Analysts were calling for +55k. December numbers were revised downward to only +48k. For last year, however, only a total of +185k jobs were added for the entire year. The January report has caused concern that the Fed will now have no reason to lower rates again in the near future. Despite the positive data, all (3) major US stock indexes are lower week-on-week and the Dow is back below the 50k mark after trading above for the first (3) days of the week. The USD is lower as well which is supportive for oil prices. Gold stayed above the $5,000/oz. as the USD declined.