Oil Price Fundamental Daily Forecast – Losses Limited by US Pipeline Shutdown ahead of EIA Inventories Report

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging higher shortly before the government’s weekly inventories report on Thursday.

Traders are trying to claw back losses from the biggest two-day setback for the start of a year in three decades. Helping to underpin the market is a shutdown of a U.S. fuel pipeline while economic concerns are capping gains.

At 12:10 GMT, March WTI crude oil is trading $74.59, up $1.49 or +2.04% and March Brent crude oil is at $79.48, up $1.64 or +2.11%. On Wednesday, the United States Oil Fund ETF (USO) settled at $64.30, down $3.34 or -4.94%.

Steep Plunge to Start New Year

Both benchmarks’ cumulative declines of more than 9% on Tuesday and Wednesday were the biggest two-day losses at the start of a year since 1991, according to Refinitiv Eikon data. Reflecting near-term bearishness, the nearby contracts of the two benchmarks traded at a discount to the next month, a situation known as contango.

Cluster of Bearish Factors Weighing on Prices

A number of factors are contributing to the weakness at the start of the new year.

The World Health Organization said data from China showed that while no new coronavirus variant has been found there, the country has under-represented how many people have died in its recent, rapidly spreading outbreak. This could show up in bearish domestic demand numbers.

Raising demand concerns in the U.S. was a report showing U.S. manufacturing contracting further in December, dropping for a second straight month to 48.4 from 49.0 in November. According to the Institute for Supply Management (ISM), this was the weakest reading since May 2020.

Finally, the Federal Reserve released the minutes of its December monetary policy meeting on Wednesday, reinforcing expectations the central bank is likely to continue raising interest rates.

Higher rates could lift the U.S. Dollar, making commodities priced in the U.S. currency more expensive for foreign buyers of crude oil. This could also weigh on demand.

Additional Pressure from American Petroleum Institute Build

Crude oil inventories rose by 3.298 million barrels, American Petroleum Institute (API) data showed Wednesday, after a million bpd in U.S. refining capacity was taken offline last week.

The build in commercial crude oil inventories comes as the Department of Energy released 2.7 million barrels from the Strategic Petroleum Reserves in the week ending December 30, leaving the SPR with just 372.4 million barrels.

Gasoline stocks also rose.

Short-Term Outlook – Pipeline Shortage Ahead of Government Inventories Report

Helping drive today’s early gains is a statement from top U.S. pipeline operator Colonial Pipeline, which said late on Wednesday its Line 3 had been shut for unscheduled maintenance with a restart expected on Jan. 7.

Despite today’s short-covering rally, the pipeline shutdown is not major enough to change the trend, leaving the bear market intact.

Later today at 16:00 GMT, the Energy Information Administration (EIA) will release its latest weekly inventories figures. Traders are expecting the report to show a 1.5 million barrel build.