Last week, the oil market and its byproducts experienced a significant sell-off, with prices dropping by -7.44%. This decline, especially in trade flow activity, is concerning for oil bulls and has placed WTI within striking distance of the 200-week moving average, a key historical technical level that must hold to avoid further price drops.
One of the factors contributing to this sell-off is the increasing commercial oil inventories in the U.S. since the end of September. Demand destruction in certain segments of the industrial industry and rising domestic production have led to an “inventory glut.” The production levels of 2023 were driven by a resurgence in shale oil production, with new techniques improving extraction yields. However, the recent decline in inventory levels, potentially due to the Arctic Blast in the U.S., is yet to be confirmed as a trend.
Another factor to consider is the Strategic Oil Reserve (SPR). While refilling the SPR is seen as a fundamental reason for price support, the process is slow and strategic. The Department of Energy is refilling the reserves with sour crude, a less prevalent but important blend for heavy byproducts. The pace of refilling the SPR is limited due to logistical constraints and the lack of U.S. production for sour crude.
On the global landscape, China’s lackluster reopening efforts have disappointed many. The country is growing, but not as fast as expected. Additionally, the real estate market, particularly Evergrande’s liquidation of assets, has added pressure to the Chinese economy. Despite China increasing its oil import quota, oil markets have priced in lackluster demand.
Geopolitical events have also influenced oil prices. The escalation in the Red Sea and ongoing talks between Israel and Hamas have impacted market sentiment. Ceasefire talks breaking down could result in a rebound in prices, but from a long-term perspective, it is a bearish development. The conflict between Russia and Ukraine is another event to monitor, particularly with recent reports of Russia discussing selling gas directly to the EU.
The strengthening U.S. dollar has also exerted pressure on oil prices. Since the beginning of the year, the dollar has gradually strengthened, impacting physical commodities. The recent breakout to the upside following the FOMC meeting and other economic factors has further strengthened the dollar.
From a technical standpoint, the 200-week moving average has historically been a reliable area of support in the oil market. A breach of this support level could indicate continued selling pressure. The 200-day simple moving average is a key resistance level that crude rejected on January 29th. Despite recent downside pressure, declining volume suggests sellers may be losing steam in the near term.
In conclusion, the oil market and its byproducts experienced a sell-off last week due to various factors, including increasing inventories, geopolitical events, and a strengthening U.S. dollar. The technical landscape suggests a potential further drop in prices if the 200-week moving average is breached. It is important to reassess the oil market in light of these developments.
