Oil volatile on supply vs demand outlook

Oil prices were volatile on Wednesday, with WTI price dropping to the $77.2 per barrel level in early trading but rising to $79.2 per barrel later on. If the WTI price declines, it may encounter support near $72.4 per barrel, while resistance may be found near $82.3 per barrel.

Oil prices dropped early on Wednesday on signs of increased supply. US crude oil inventories rose unexpectedly by 16.3M this week, against predictions of a 1.5M growth. The US Government announced on Monday the release of another 26 million barrels from its strategic stockpiles. The US strategic stockpiles are becoming depleted, threatening to drop to multi-decade lows, after the Biden administration sold a record 180 million barrels last year. This more recent release from the US reserves will help to allay supply concerns, driving fuel prices down.

On the other hand, the oil demand outlook is also increasing, boosting oil prices. OPEC+ upgraded its 2023 forecast based on expectations for China’s economic recovery. The organization released its updated projections for 2023, raising its demand forecast by 100,000 bpd. Most of the increased demand is expected to come from China, with an increase of 590,000bpd. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand. The Chinese government has eased some of its strident Covid regulations, abandoning its zero-Covid policy. China has re-opened its borders after almost three years, fuelling hopes of economic recovery. 

US CPI data on Tuesday showed that price pressures remain high and are not easing at the pace anticipated. US headline inflation in January dropped to 6.4% year-on-year versus the 6.2% expected. January’s CPI print illustrates the danger of inflation becoming entrenched, which may force the Fed to rethink its recent dovish pivot. The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. Current market odds lean towards further tightening in the upcoming Fed meetings and an increase in interest rates up to 5.25%. 

Recession concerns still run high and aggressive rate hikes stifle economic activity, limiting the oil demand outlook. As inflation starts to cool though, central banks are starting to lower the pace of rate hikes, which may raise future oil demand expectations. 

A price cap on Russian oil exports was set on February 5th. G7 leaders set the price cap of Russian oil exports at $100 per barrel on diesel and other products that trade at a premium to crude and $45 per barrel for products that trade at a discount. Meanwhile, Russia announced plans to reduce oil production next month. Russia threatened to cut oil output by 500,000 barrels per day as a retaliation for the price cap on the country's oil exports.

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Written by:
Myrsini Giannouli

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