Oil Prices Consolidate on Mixed Signals

Oil – Fundamental Analysis

Crude prices entered a $2.00/bl. range-bound “consolidation” period last week which continued into this week. Such price boundaries signify indecision on the part of traders due to varying market signals. The OPEC+ output increase was “baked-in” to the market ahead of the official meeting, but future plans were not known until Sunday. A US/China trade deal was announced but scant details were released. And the weekly inventory report held an unexpected surprise. WTI prices had their weekly high of $61.50/bl. on Monday but fell to a low of $58.85 by Thursday.  Brent followed a similar pattern, hitting its high of $65.30/bl. on Monday with its weekly low of $62.85 on Thursday as well. Both grades settled lower vs. last week by about -$1.50/bl. The WTI/Brent spread has tightened to ($4.08).  

 The OPEC+ group made their +117k bld. output increase for December official this past Sunday. However, they also announced a pause in further increases which was not expected. OPEC themselves have always been “bullish” on future oil demand vs. other market analyses such as the IEA. But this may be signaling a different take on the supply/demand balance. Saudi Arabia, clearly the largest oil producer of the group, just lowered its price for sales to Asia to the lowest level in (11) months. Traders appear to be in agreement as futures prices are still in a “backwardated” pattern whereby the near month is trading higher than “out” months indicating a view that future demand will be less. Reinforcing the uncertainty in the market is the fact that futures prices for WTI, the US grade, are in a range of $59.20 to $59.70 for the next (12) months with $60.00/bl. not seen until September 2027.

 The IEA continues to forecast an oil surplus and recently cited a 102 million bl. water-bourn supply in September which the agency says is the largest increase since the pandemic. Goldman Sachs analysts also agree with the IEA’s assumptions and are bearish on oil prices in the near term. On a more bullish note, Wood Mackenzie contends that global demand for oil will continue to increase at least until 2032 as the goals of the Paris Accord are not being met.

 Ukraine continues its assault on Russian oil infrastructure with the latest attack hitting a Lukoil refinery, one of Russia’s largest refined product hubs. The sanctioned oil company was reported to have reached a deal with Guvnor to sell certain assets which Guvnor has now declined to pursue. And China has amassed over +1.0 billion in oil reserves through the first (9) months of the year. As one of Russia’s largest markets, China has both provided themselves with a “cushion” should the latest round of sanctions actually impact Russian exports while, at the same time providing the market some underlying support.

 The Energy Information Administration’s Weekly Petroleum Status Report (still released despite the government shut-down) indicated that commercial crude oil inventories for last week increased by +5.2 million bl. to a total of 421 bl. million and -4% below the 5-year average. The API forecasted a +6.5 million bl. gain while market analysts forecasted a -0.1 million decrease. US refinery utilization increased to 86.6% from 86.0%, representing a change in inputs to 15.3 million bpd. Total motor gasoline stocks fell -5.9 million bl. to 217 million bl. and are now -5% below the 5-year average. Distillates decreased -0.6 million bl. to 111.4 million Bbl. and are now at -9% below the 5-year average. Inventory at the key Cushing, OK hub changed +0.3 million Bbl. to 22.9 million Bbl. or 30% of capacity. The SPR was +500k bbl. to 409.6 million bbl. Imports of crude oil were +875k bpd. to 5.9 million Bbld. vs. 5.0 the prior week while exports were 4.4 million bpd. vs. 4.4 the prior week. Exports of petroleum products were 7.0 million bpd. last week vs. 6.7 the prior week. Total US oil production was 13.6 million bld. vs. 13.5 last year at this time.

 AAA’s average US retail gasoline prices at the pump were most recently reported at $3.08/gal.,

 +$0.04/gal. vs. last week, -0.13 /gal. from last month and -$0.03/gal. less than a year ago.

 Tech stocks have gotten hit hard this week as the market assesses the trillions of dollars committed to AI projects with fears of a “bubble” developing. The University of Michigan gauge of consumer sentiment fell to 50.3 this month vs. 53.6 last month as the government shut down continues. It’s the lowest reading since June 2022. WSJ analysts had expected only a drop to 53.0. All (3) major US markets are down this week as a result. The USD is also lower, which normally supports oil prices through foreign currency buyers.