Crude oil supported by tightening fuel outlook

A three-day bounce in crude oil, driven by a combination of the mentioned support from rising fuel prices and hedge funds having finished exiting wrongfooted longs, was given some additional support on Wednesday after the US Energy Information Administration sowed doubt about the outlook for US production growth. In their monthly Short-term Energy Outlook (STEO) the EIA said it did not expect that the record production of 13.3 million b/d reached in December, and temporarily cut to $12.6 million b/d in January due to shut-ins from frigid weather, would be exceeded until February 2025.

The forecast stands in contrast to that of the International Energy Agency who sees continued non-OPEC supply growth being led by the US, Canada, Brazil and Guyana. Even OPEC in their latest update saw non-OPEC supply in 2024 rise by 1.34 million barrels/day with nearly half the increased coming from the US. Note: OPEC and IEA will publish their monthly reports next week on February 13 and 15. 

With US production growth potentially stalling, the OPEC+ group of producers, currently keeping 2.2 million barrels/day off the market, should find it easier to manage production and support (higher) prices going forward, especially with global demand expected to rise around 1.5 million b/d, supported by a robust US economy and Beijing stepping up efforts to support the Chinese economy. For now, however, these developments do not alter our view that rangebound market conditions will prevail in the short-term. 

Later today, the EIA will publish its weekly inventory report (insert below) and given the current strength in refinery margins, changes in gasoline and distillate stocks will be watched closely. According to the American Petroleum Institute (API) who released their report last night, the market can expect another sizable distillate draw being offset by an equal strong rise in gasoline stocks. If confirmed by the EIA it would drive gasoline stocks to a June 2020 high and distillates some 7% below the five-year average. Crude oil stocks meanwhile are expected to show a rise which will be in line with the seasonal behaviour. 

WTI crude oil continues to trade within the uptrend that was established in early December when the Red Sea attacks began. However, the recent strong rally and subsequent steep decline highlights a market struggling for direction. The ascending trend line is currently providing support around $72.40 while a move above $74, the 21-day moving average, may signal a return to neutral.