Oil prices struggle to break above $80 brent level amid mixed signals on supply and demand
Oil prices remained within a tight trading range in the Asian trade on Wednesday as conflicting signals on global supply and demand kept prices from breaking above key levels. Mixed data on U.S. inventory also contributed to the indecisiveness in the market.
Increased oil supply offsets concerns over Middle East conflict
While there has been a return of some U.S. oil production capacity after disruptions from cold weather, the production at Libya’s largest oilfield also resumed earlier this week. This, coupled with an increase in Norwegian crude output, signals a boost in oil supply in the near-term. However, concerns over the escalating conflict in the Middle East, including the Israel-Hamas war and clashes in Yemen and the Red Sea, are counteracting the increased supply.
Brent prices struggle to sustainably breach the $80 a barrel level
Due to the conflicting signals in the market, crude prices have remained within a tight trading range. The uncertainty has also prevented Brent prices from breaking above the $80 a barrel level on a sustained basis. Currently, the March futures are steadying at $79.60 a barrel, while WTI prices remain flat at $74.32 a barrel.
Weaker economic growth and cooling demand weigh on oil prices
Both Brent and WTI contracts began the year with a weak start, primarily driven by concerns of cooling economic growth and its impact on oil demand. In 2023, oil prices slid over 10% due to worries over looser markets and diminishing demand. Weak gross domestic product figures from China, the world’s largest oil importer, further contributed to the uncertainty in crude markets.
Focus on economic activity indicators and upcoming data releases
Investors are now closely watching a series of purchasing managers index readings from major economies, scheduled to be released this week. These readings will provide insights into the state of economic activity in January. Additionally, fourth-quarter GDP data is expected to be announced on Thursday, followed by the release of personal income and spending data, the Federal Reserve’s preferred inflation gauge, on Friday.
U.S. inventories show mixed cues and highlight weak demand
According to data from the American Petroleum Institute (API), inventories shrank by 6.7 million barrels in the week to January 19, primarily due to severe cold weather disrupting production. However, the API data also revealed an increase in gasoline inventories and a small draw in distillate stockpiles, indicating weak demand in the largest fuel consumer, the United States. Fuel demand in the country has declined significantly as travel conditions deteriorated.
Outlook for U.S. inventories and market expectations
The API figures typically align with the data from the U.S. Energy Information Administration (EIA), which is expected to be released later on Wednesday. Analysts anticipate a draw of 3 million barrels in oil inventories, while gasoline stockpiles are projected to increase by 2.2 million barrels. These figures provide further insights into the state of U.S. inventories and offer important cues for the oil market.
Analyst comment
Positive news: Increased oil supply offsets concerns over Middle East conflict. This suggests a boost in oil supply in the near-term, which could help stabilize prices.
Neutral news: Brent prices struggle to sustainably breach the $80 a barrel level. The conflicting signals in the market and uncertainty have prevented prices from breaking above this level on a sustained basis.
Negative news: Weaker economic growth and cooling demand weigh on oil prices. Concerns over cooling economic growth and diminishing demand have already caused oil prices to slide, and weak GDP figures from China contribute to the uncertainty in crude markets.
As an analyst, it is expected that the market will continue to face uncertainty and volatility due to conflicting signals on supply and demand, geopolitical tensions in the Middle East, and economic factors. Investors will closely monitor economic activity indicators and upcoming data releases for more insights into the state of the market. The expected draw in U.S. oil inventories and increase in gasoline stockpiles could provide further cues for the oil market.
