Oil Markets Ignore Bearish News

U.S. West Texas Intermediate crude oil futures are edging lower on Friday but remained in a position to post a sixth week of gains, as the rollout of novel coronavirus vaccination programs fed hopes that demand for fuel would rebound next year. Traders are largely ignoring a massive build in U.S. crude inventories, which is signaling an abundant crude oil supply.

Rally Fueled by Vaccine Optimism

Promising vaccine trials are helping to lift some of the worries associated with the record increases in the number of new COVID-19 infections and deaths around the world.

The U.K. began inoculations this week and the United States could start vaccinations as early as this weekend, while Canada on Wednesday approved its first vaccine with initial shots due from next week.

Outside advisers for the U.S. Food and Drug Administration have voted to endorse the emergency use of Pfizer’s vaccine, paving the way for the agency to authorize its use to inoculate a nation that has lost more than 285,000 lives to COVID-19.

Still Plenty of Supply Available

A big jump in U.S. crude stockpiles last week served as a reminder that there is still plenty of supply available, but it was all but ignored as bulls ran through the market this week.

U.S oil stockpiles surged dramatically last recent week, with crude inventories jumping by more than 15 million barrels as imports surged and exports plunged, the Energy Information Administration said on Wednesday.

The unexpected supply build and record rise in net imports stunned the oil market, which has been weighed down by low demand due to the coronavirus pandemic.

Crude inventories rose by 15.2 million barrels in the week to December 4 to 503.2 million barrels, the largest build in crude inventories since April, compared with analysts’ expectations in a Reuters poll for a 1.4 million-barrel drop.

Net crude imports rose by a record high of 2.7 million barrels per day, the EIA said. That boosted U.S. Gulf Coast stocks by 11.8 million barrels, the most in one week ever, according to EIA data.

U.S. crude exports plunged by 1.6 million bpd to just 1.8 million bpd, the lowest since 2018, while imports rose 1.08 million bpd.

Gasoline stockpiles rose by 4.2 million barrels in the week to 237.9 million barrels, the EIA said, compared with expectations for a 2.3 million-barrel rise.

Distillate stockpiles rose by 5.2 million barrels in the week to 151.1 million barrels, versus expectations for a 1.4 million-barrel rise, the EIA data showed.

Oil Sees More Fund Buying

The hedge funds got it right. As of the close on December 4, hedge fund managers were substantial buyers of petroleum futures and options last week for the fourth week in a row, a sign of increasing confidence coronavirus vaccines will drive a recovery in oil consumption next year.

Funds purchased the equivalent of 44 million barrels in the six most important petroleum futures and options contracts in the week to December 1, taking total purchases over the four most recent weeks to 304 million barrels.

The net position held by hedge funds and other money managers has been raised to 661 million barrels, the highest level since July-August, between the first and second waves of coronavirus, and before that January.

Traders Watching External Factors

It wasn’t much, but oil prices did dip earlier in the week on rising tensions between the United States and China, the world’s top oil consumers. Prices came under pressure after Reuters exclusively reported that the United States was preparing to impose sanctions on at least a dozen Chinese officials over their alleged role in Beijing’s disqualification of elected opposition legislators in Hong Kong.

This is important because China, the world’s top crude oil importer, has helped support crude prices this year. In the first 11 months of the year, China imported a total of 503.92 million tonnes, or 10.98 million bpd, up 9.5% from a year earlier.

In other news, Reuters reported that Iran has instructed its oil ministry to prepare installations for the production and sale of crude oil at full capacity within three months, state media said last Sunday. This news raises the issue of more supply.

Weekly Technical Analysis

Weekly February WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart. The uptrend was reaffirmed when buyers took out last week’s high. A trade through $34.50 will change the main trend to down so it’s safe for now, but still vulnerable to a reversal top or short-term correction because of overbought conditions.

The main range is $57.58 to $27.22. Its retracement zone at $46.04 to $42.45 is controlling the longer-term direction of the market. Crude oil is currently in a position to close on the bullish side of this area.

Weekly Technical Forecast

Based on this week’s price action, the direction of the February WTI crude oil market the week-ending December 18 should be determined by trader reaction to the 61.8% level at $46.04.

Bullish Scenario

A sustained move over $46.04 will indicate the presence of buyers. If this move creates enough momentum then look for an acceleration to the upside since the nearest resistance is $49.07. Overtaking this level could trigger an acceleration to the upside with $53.60 the next near-term target. 

Bearish Scenario

A sustained move under $46.04 will signal the presence of sellers. If this move generates enough downside momentum then look for the selling to possibly extend into the 50% level at $42.45. This is a potential trigger point for an acceleration to the downside. However, with the main trend up, buyers are likely to come in on a test of this level.

Short-Term Outlook

Speculators are primarily focused on the coronavirus vaccine and ignoring the case and death numbers from COVID-19. Traders also appear to be ignoring the stalemate in Congress over coronavirus stimulus. Their feeling is “if not now, then later when President-elect Joe Biden takes office on January 20”.

They seem to be willing to ride out the storm as the economy continues to show signs of weakness. On Thursday, a report from the Labor Department showed weekly jobless claims jumped to 853,000, its highest point since September 19 and up from 716,000 in the previous week.

This week’s price action also suggests traders aren’t too worried about the rising U.S. supply and are primarily concerned about the future impact on demand as the number of vaccinations continues to increase.

Although the market may be vulnerable to periodic short-term pullbacks, the tone is expected to remain bullish as long as there is optimism over the vaccines.