Oil Price Fundamental Daily Forecast – Downside Will Be Limited as Long as Demand Rebound Outstrips Supply

The volatility in the crude oil market over the past three weeks continued on Wednesday with a sharp sell-off into the close amid a steep rise in the U.S. Dollar and the threat of additional supply from the Biden administration. A broader surge in inflation also pressured prices as investors dumped riskier assets, including stocks and commodities, driven by expectations that central bankers will take steps to curb rising prices.

So far on Thursday it appears traders are taking a “wait and see” approach as prices have barely moved amid well-below average overnight volume. Perhaps the trade is light because of the Veterans Day bank holiday in the United States. The stock market is open, but the government bond market is closed.

At 07:15 GMT, January WTI crude oil is trading $80.07, up $0.01 or +0.01% and January Brent crude oil is at $82.84, unchanged.

Dollar Climbs as US Inflation Surge Fuels Rate Hike Speculation, Dampening Foreign Demand for Crude

The government reported on Wednesday that consumer inflation (CPI) surged at its fastest rate in 30 years. The news fueled a wave of fear in the market on the thought that both the White House and the U.S. Federal Reserve may take action to stem the rise in prices.

The news also drove Treasury yields sharply higher, pulling up the U.S. Dollar. The strong dollar weighed on crude oil on the notion it would drive down foreign demand for the dollar-denominated commodity.

More Supply May Be Coming

Also weighing on prices was speculation the Biden Administration would tap the strategic reserve for crude oil and gasoline in an effort to drive down prices for consumers ahead of winter. A price drop by these two commodities would also weigh on both producer and consumer inflation.

Reuters reported that Biden said he asked the National Economic Council to work to reduce energy costs and the Federal Trade Commission to push back on market manipulation in the energy sector in a larger effort to reverse inflation.

US Crude Stocks Edge Up, Fuel Inventories Down – EIA

U.S. crude stocks rose last week, in part due to an injection into commercial supplies from the U.S. strategic reserves, while inventories of gasoline and distillates like diesel declined further, the Energy Information Administration said on Wednesday.

Crude inventories rose by 1 million barrels in the week to November 5, compared with analysts’ expectations for an increase of 2.1 million barrels. The increase was due in part to a 3.1 million-barrel release from the U.S. Strategic Petroleum Reserve, the largest since July 2017.

Gasoline stocks fell by 1.6 million barrels, the fifth consecutive week of draws for the most-used U.S. fuel. Overall stocks are at levels not seen since November 2017.

Distillate stocks, which include diesel and jet fuel, were down as well, dropping by 2.6 million barrels, versus expectations for a 1.1 million barrels drop. Distillate stocks are at their lowest since April 2020.

Crude stocks at the Cushing, Oklahoma, delivery hub fell by 34,000 barrels, the EIA said.

Daily Forecast

Continue to monitor those fuel numbers. The decline in stocks came even as refiners ramped up activity in the most recent week, boosting utilization rates by 0.4 percentage points to 86.7% of overall capacity. Refinery crude runs rose by 343,000 barrels per day.

What this means is demand is sucking up gasoline as soon as it’s produced.

The question is, even with the release of oil and gas from the strategic reserve, will it satisfy the country’s current demand needs?

The EIA report revealed some oil was already released last week for commercial use. But Wednesday’s price action suggests more may be coming.

In my opinion, all of the news this week is short-term bearish. As long as crude oil demand continues to rebound faster than supply, prices will remain underpinned.