Oil Markets Shrug Off Gasoline Demand Fears

U.S. West Texas Intermediate crude oil futures are putting in a mixed performance on Friday, but still headed to their biggest weekly gain since mid-December as a slew of positive developments encouraged traders to add to their bullish positions.

The week started with the news that bullish hedge funds had returned to the market as the threat from the Omicron coronavirus variant receded. The early rally gained momentum after OPEC+ agreed to lift output in February in a move that suggested strong confidence in future demand.

Midweek, prices rose further after a drawdown in U.S. inventories confirmed the tightening supply situation. Finally, supply worries replaced demand concerns late in the week as unrest in Kazakhstan and outages in Libya spurred new concerns over global stockpiles. This development drove prices to within striking distance of the contract high.

Hedge Funds Rebuild Bullish Positions

The new year began with a report from Reuters indicating that portfolio investors had started to rebuild bullish positions in the oil market, reassessing earlier fears about the likely impact of the Omicron variant of coronavirus on major economies and passenger aviation in 2022.

Hedge funds and other money managers purchased the equivalent of 54 million barrels in the six most important petroleum futures and options contracts in the week to December 28.

Funds have purchased a total of 70 million barrels over the two most recent weeks, after selling 327 million over the previous 10 weeks, according to records published by regulators and exchanges.

Last week’s buying was the fastest since August, and among the most rapid rates for more than a year, signaling a sharp turnaround from previously bearish investor sentiment.

OPEC+ Sticks with Planned Output Increase

OPEC and its allies agreed on Tuesday to stick to its planned increase in oil output for February because it expects the Omicron coronavirus variant to have a short-lived impact on global energy demand.

The group of producers compromising the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia has raised its output target each month since August by 400,000 barrels per day (bpd).

Current plans would see OPEC+ again raise the target by 400,000 bpd for February, leaving about 3 million bpd in cuts to unwind by September, in line with an agreement last July.

OPEC+ Downplays Omicron’s Impact on Demand

In a technical report seen by Reuters on Sunday, OPEC+ played down the impact on demand of the Omicron variant, saying it would be “mild and short-lived” and was upbeat about economic prospects.

“The impact of the new Omicron variant is expected to be mild and short-lived, as the world becomes better equipped to manage COVID-19 and its related challenges,” the Joint Technical Committee (JTC) report said.

“This is in addition to a steady economic outlook in both the advanced and emerging economies,” it added.

EIA:  US Crude Stockpiles Decline, Fuel Inventories Rise

According to the U.S. Energy Information Administration (EIA) in a report released Wednesday morning, U.S. crude stocks dropped by 2.1 million barrels. This was less than the 3.5 million draw estimate. Traders blamed part of the selling on tax incentives for producers to reduce inventories before year-end.

However, gasoline inventories jumped by more than 10 million barrels, and stocks of distillates rose by 4.4 million barrels. Analysts cited soft demand during the last week of 2021 as people hunkered down due to the Omicron variant of the coronavirus.

Crude Oil Extends Rally on Supply Concerns Over Kazakhstan Unrest, Libyan Outages

WTI and Brent crude oil futures jumped on Thursday, extending yesterday’s rally, on escalating unrest in OPEC+ oil producer Kazakhstan and supply outages in Libya.

According to CNBC, Russia sent paratroopers into OPEC+ oil producer Kazakhstan on Thursday to help quell a countrywide uprising after deadly violence spread across the tightly controlled former Soviet state.

“The political situation in Kazakhstan is becoming increasingly tense,” Commerzbank said. “And this is a country that is currently producing 1.6 million barrels of oil per day.”

There were no indications that oil production has been affected so far, but the price action suggests speculative buyers are taking no chances.

In other news, Libyan oil output is down by over 500,000 barrels per day due to pipeline maintenance and oil field shutdowns.

Weekly Technical Analysis

Weekly March WTI Crude Oil

Trend Indicator Analysis        

The main trend is up according to the weekly swing chart. A move through $62.05 will change the main trend to down. A trade through $80.72 will negate the closing price reversal top and signal a resumption of the uptrend.

The minor trend is up. It changed to up the week-ending December 24 when buyers took out the minor top at $72.82. This shifted momentum to the upside. A trade through $65.93 will change the minor trend to down.  

Retracement Level Analysis

The market is currently trading on the strong side of a short-term retracement zone at $73.59 to $71.38, making it support. This is followed by additional support levels at $70.47 and $67.68.

The two zones combine to form a potentially strong support cluster at $71.38 to $70.47.

Weekly Technical Forecast

The direction of the March WTI crude oil market the week-ending January 14 will be determined by trader reaction to the contract high at $80.72.

Bullish Scenario

A sustained move over $80.72 will indicate the presence of buyers. If this move is able to generate enough upside momentum then look for a possible surge into $85.00 over the near-term.

Bearish Scenario

The inability to overcome $80.72 will indicate the presence of sellers. It won’t be a particularly bearish signal, but it may mean that buyers see the market as overvalued at current price levels. This would encourage longs to take profits. This could drive the market into a value zone where new buyers would come in to provide support.

Short-Term Outlook

The sharp rise in prices is being well supported by the big money hedge funds and money managers. Crude oil prices are also being underpinned by OPEC+. Although supply will rise in January and February, the group feels there will be enough demand to offset the increase. This is helping to give buyers the confidence to add to their long positions. Furthermore, OPEC and its allies will be ready to make adjustments to output if necessary.

The situations in Kazakhstan and Libya are the wildcards this week. With prices hovering just below the contract high, any supply disruptions could trigger a spike to a new multi-year high.

Even if the situation eases, the rally should remain intact. We could see a pullback in prices as speculative buyers liquidate positions, but the selling shouldn’t be strong enough to change the trend to down.