Long

OIL: Red Sea tension could support Oil price in short term

Updated

🔴 Oil jumped as the US and its allies launched airstrikes against Houthi rebels in Yemen, retaliating for attacks on ships in the Red Sea that have imperiled flows of fuel and goods through the vital waterway.
President Joe Biden said strikes had been conducted against a number of targets used by the Iran-backed group, with US officials saying radar sites and missile launchers were hit. A tanker industry group said military forces in the region were advising ships to avoid a key chokepoint near Yemen. The Houthis said all US and UK interests are now legitimate targets.

🔴 The main upside risk for prices concerns Iran and whether it’s drawn directly into the conflict, which could threaten oil supply in a region that produces a third of the world’s crude. The war-risk premium had previously been easing amid ample output from non-OPEC+ producers and slowing demand growth.

🔴 From our point of view, geopolitical tensions could support Oil Price in the short term, and from a technical point of view, our first Target is just below $80.

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🔴 Risk of a short-term downside before a price recovery still exists:

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🔴 West Texas Intermediate (WTI) crude oil closed with a small gain on Wednesday despite weak economic data from China, the largest importer, even as OPEC left its 2024 demand forecast unchanged in its influential Monthly Oil Market Report. WTI crude oil for February delivery closed up US$0.16 to settle at US$72.56 per barrel, while March Brent crude, the global benchmark, was last seen down US$0.34 to US$77.95.
China reported a 5.2% rise in fourth-quarter gross domestic product, under a consensus estimate for a 5.3% rise according to a Reuters poll, while concerns over the health of the country's real-estate sector continue. The weak data comes as concerns over sagging demand continue amid geopolitical worries as tensions rise in the Middle East. Israel's war against the Hamas militant group continues, while Yemen's Houthis attack shipping in the Red Sea and Iran carries out missile strikes in Pakistan and Iraq. "The oil market is being given every opportunity to ascend but it is reluctant to do so," PVM Oil Brokers noted.
OPEC on Wednesday reiterated its 2024 demand forecast, seeing demand rising by 2.2 million barrels per day this year over 2023. with two-million barrels of new demand coming from less-developed economies. The cartel expects 2025 demand growth of 1.8 million bpd. The cartel forecast non-OPEC supply growth of 1.3-million bpd on higher production from the United States, Brazil, Canada, Norway, Kazakhstan and Guyana.

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🔴 WTI crude futures rose to $73.5 per barrel on Thursday, continuing their upward trend due to strong demand estimates from both the IEA and OPEC. The IEA revised its 2024 oil demand growth projection to 1.24 million bpd, up by 180,000 bpd, citing improved economic growth and lower crude prices in Q4.
OPEC maintains its forecast of 2.25 million bpd demand growth in 2024, with a strong expectation of 1.85 million bpd growth in 2025. Geopolitical risks in the Middle East and disruptions to U.S. output further fueled the price rise. Attacks by Houthi militants in the Red Sea forced cargo diversions, increasing journey times and costs. In North Dakota, extreme cold weather led to a significant drop in oil output. And, contrary to API indications, US government data showed a 2.492 million barrel decline in domestic crude stockpiles last week.

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📈 Technical resistance area approach:

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🔴 Oil prices were little changed on Tuesday as traders weighed a host of conflicting supply and demand worries, from rising tensions in the Middle East to cold weather woes disrupting production in the United States. Both the contracts had settled about 2% higher on Monday, as a Ukrainian drone strike on Novatek's Ust-Luga fuel export terminal raised supply concerns and drove up prices. Analysts say Novatek is likely to resume large-scale operations there within weeks. While damage to loading berths at the Ust-Luga terminal only "briefly impacted exports," the move raises the prospect of the Russia-Ukraine war "moving into a new phase where parties target key energy infrastructure," analysts at ANZ Research said in a note.
In the Middle East, U.S. and British forces have also carried out a fresh round of strikes targeting a Houthi underground storage site and missile and surveillance capabilities used by the Iran-aligned Houthi group. The attacks by the Houthis on vessels in and around the Red Sea region have disrupted global shipping and stoked fears of inflation. The group has said their attacks are in solidarity with Palestinians as Israel strikes Gaza. Some analysts also remained bullish on near-term market fundamentals because of these ongoing conflicts.
"Without any recession concerns, the impact of extreme weather on U.S. crude oil production and the escalation of geopolitical conflicts still support oil prices," said CMC Markets' Shanghai-based analyst Leon Li. In the U.S., 20% of North Dakota's oil output remained shut in due to extreme cold and operational challenges, the state's pipeline authority said on Monday. Capping price gains, however, are concerns over China's sputtering economic recovery, which is raising worries about global oil demand given the Asian giant is the world's biggest crude oil importer. Chinese policymakers have rolled out a raft of measures to shore up the economy but domestic consumption remains tepid, leaving oil traders on edge about demand prospects.
"Given conflicting fundamental factors right now in WTI crude (market), the momentum factor is likely to be the main driver in setting the stage for oil prices in the short term," said OANDA senior markets analyst Kelvin Wong.
WTI crude prices managed to close above their 50-day moving average on Monday for the first time since Oct. 24 last year. The bullish close followed a similar daily close above the 20-day moving average last Thursday, he added.
A Reuters poll showing that U.S. crude oil inventories were forecast to fall by about 3 million barrels in the week to Jan. 19 also limited price weakness. Distillate stockpiles were expected to drop last week, while gasoline inventories were set to rise. Official government data is expected to be out on Jan. 24.

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🔴 Crude oil futures rise ahead of the EIA's weekly inventories report that's expected to show a decline in crude stocks and a further build in gasoline. Ritterbusch notes the API's report of a 6.7 million-barrel reduction in crude stocks. "The market's indifference to the big decline is being prompted by supply uncertainties related to last week's cold weather that cut production appreciably," the firm says in a note. Analysts in a Wall Street Journal survey predict a 1.4 million-barrel draw on crude stocks for the week through Jan. 19, with gasoline stocks up 1.5 million barrels and distillates down by 700,000 barrels. WTI for March delivery is up 0.7% at $74.90 a barrel, and Brent is 0.5% higher at $79.95.

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🔴 Money managers cut their gross short positions on the US benchmark by 33,649 lots to 78,598, the biggest cut since April. The trimming of short positions helped bring net-long positions in WTI to 134,140, the highest in 11 weeks, according to weekly CFTC data.

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