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James Hyerczyk
WTI and Brent Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil finished sharply lower last week after hitting a multi-month high earlier in the week. Once again the rally was fueled by speculators betting on a supply disruption because of an event. Once again they were crushed when supply was not disrupted.

Many analysts continue to report on the past, but few are willing to tell it like it is. Both U.S. and Brent crude are trading lower for the year as traders reverted back to the traditional fundamentals. What we saw last week between the U.S. and Iran were one and done events. No oil spilled. No oil production facilities destroyed. No oil fields set on fire. No sustained rally.

Last week, March WTI crude oil settled at $58.99, down $3.83 or -6.10% and March Brent crude oil closed at $64.98, down 3.62 or -5.57%.

U.S. Energy Information Administration Weekly Inventories Report

Crude oil prices were also hit hard on Wednesday after U.S. crude oil stockpiles rose unexpectedly last week and gasoline inventories surged by their most in a week in four years, the Energy Information Administration (EIA) said on Wednesday. The report offset Tuesday’s slightly bullish numbers released by the American Petroleum Institute (API).

The EIA reported that crude inventories rose by 1.2 million barrels in the week-ended January 3 to 431.10 million barrels, compared with analysts’ expectations in a Reuters poll for a 3.6 million-barrel drop.

U.S. gasoline stocks surprised as well, rising by 9.1 million barrels in the week to 251.6 million barrels, compared with expectations in a Reuters poll for a 2.7 million-barrel rise. That was the largest one-week gain in gasoline inventories since January 2016. Gasoline supplied over the last four weeks was 0.4% lower than the same period a year ago due to weak demand.


Weekly Forecast

We’re likely to continue to see heightened volatility and overreactions to the upside if the tensions in the Middle East escalate, but a bull market trend is not likely to form unless there is an event that leads to a substantial reduction in supply.

You have to remember that OPEC and its allies are currently cutting production by 1.7 million barrels of oil per day and look were prices are. If there was a substantial disruption in supply, we’re likely to see another speculative surge to the upside, but OPEC+ would then flood the market with the oil they have been holding back. And as prices rise, it wouldn’t take long for U.S. companies to start producing at record levels.

One thing that stood out last week that may have been missed was the jump in gasoline inventories in both the API and EIA weekly inventories reports. Traders cited the lack of demand for the high levels. This may lead to a rise in U.S. crude inventories.

Gains in the crude oil market could be capped if inventories start to rise. But before you get too bearish, the OPEC+ cuts and the hope of increased demand due to the US-China trade deal are likely to be supportive.

This all adds up to a rangebound market. Prices are very likely to retreat to pre-Christmas levels where they sat for 5 weeks before volatility resurfaced.

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