Sentiment In Oil Markets Is Decidedly Bearish

U.S. benchmark February WTI crude oil futures closed lower for a fifth straight session on Thursday, solidifying a lower close for the week. The market was higher earlier in the day on word of a closure of a major Canada-to-U.S. crude pipeline. However, those gains were erased when traders shifted their focus to concerns that global economic slowdowns would slash fuel demand.

Keystone Pipeline Shutdown Provides Early Support

Canada’s TC Energy said it shut its 622,000 barrel-per-day Keystone pipeline after a spill into a Kansas creek, Reuters reported.

Oil prices rose after the company announced the closure, but the rally dissipated as analysts noted that the U.S. Gulf is likely to have enough inventory to handle short-term outages.

According to Reuters, several analysts also said the section of the line that goes to Midwest refiners could be restarted soon. TC Energy has not announced when the pipeline would reopen.

Numerous Factors Weighing on Prices This Week

Fundamentally, traders are blaming this week’s sell-off partly on a surge in U.S. gasoline and distillate stockpiles. Fear of a recession and worries about Fed rate hikes are also weighing on sentiment. The week started on the wrong foot for bulls when OPEC+ decided not to cut output.

Uncertainty over how the Russian oil ban is expected to work could be another reason why traders are liquidating long oil positions.

Recession Fears Drive Demand Worries

The top ranking executives at the biggest U.S. banks are bracing for a worsening economy next year as inflation threatens consumer demand, Reuters reported. The news helped drive up demand for the safe-haven U.S. Dollar, which weighed on foreign demand for dollar-denominated crude oil. 

JPMorgan Chase & Co Chief Executive Jamie Dimon told CNC, “Those things might very well derail the economy and cause this mild to hard recession that people are worried about,” he said.

Bank of America CEO Brian Moynihan told investors at a Goldman Sachs financial conference that the bank’s research shows “negative growth” in the first part of 2023, but the contraction will be “mild.”

Goldman Sachs CEO David Solomon added, “Economic growth is slowing. When I talk to our clients, they sound extremely cautious.”

US Crude Stocks Decline; Fuel Stocks Post Large Builds – EIA

U.S. crude stocks fell in the latest week while gasoline and distillate inventories posted big builds, as oil refiners’ utilization climbed to the highest since 2019, the Energy Information Administration (EIA) said on Wednesday.

The EIA reported a 5.2 million barrel draw in crude stocks. Traders were looking for a 3.5 million barrel draw.

This was potentially bullish news, but the government also reported that U.S. distillate stocks grew by 6.2 million barrels, far exceeding estimates for a 2.2 million barrel rise. Gasoline inventories climbed 5.3 million barrels against expectations for an increase of 2.7 million barrels.

China Loosens Anti-COVID rules in Major Policy Shift

China announced on Wednesday the most sweeping changes to its tough anti-COVID regime since the pandemic began three years ago, loosening rules that curbed the spread of the virus but had hobbled the world’s second largest economy and sparked protests.

On paper, the news is potentially bullish, but the price action suggests the move may not be enough to put a major dent into the demand situation.

Tanker Issues Could Be Supportive

Reuters is reporting that Western officials are in talks with Turkish counterparts to resolve oil tanker queues off Turkey after the G7 and European Union rolled out new restrictions on Dec. 5 aimed at Russian oil exports. Their source is a British Treasury official.

“The UK, U.S. and EU are working closely with the Turkish government and the shipping and insurance industries to clarify the implementation of the Oil Price Cap and reach a resolution,” the official told Reuters.

“There is no reason for ships to be denied access to the Bosporus Straits for environmental or health and safety concerns.”

This is a potentially bullish development because it could prevent oil from reaching the market in a timely manner, leading to supply bottlenecks.

Weekly Technical Analysis

Weekly February WTI Crude Oil

Trend Indicator Analysis        

The main trend is down according to the weekly swing chart. A move through $91.19 will change the main trend to up. A trade through $60.05 will reaffirm the downtrend.

The minor trend is also down. A trade through $83.27 will change the minor trend to up. This will also shift momentum to the upside.  

Retracement Level Analysis

The contract range is $36.16 to $106.51. Its retracement zone at $71.34 to $63.03 is the next major downside target and value zone.

The minor range is $83.27 to $71.27. Its pivot at $77.27 is the nearest support.

Weekly Technical Forecast

The direction of the February WTI crude oil market the week-ending December 16 is likely to be determined by trader reaction to the long-term 50% level at $71.34

Bullish Scenario

A sustained move over $71.34 will signal the presence of buyers.  If this move creates enough upside momentum then look for a surge into the minor pivot at $77.27.

Overtaking $77.27 will indicate the short-covering rally is getting stronger. This could trigger an acceleration into the minor top at $83.27.

Bearish Scenario

A sustained move under $71.34 will signal the signal the selling pressure is getting stronger. This will put the market in a position to challenge the Fibonacci level at $63.03.

Short-Term Outlook

Bearish fundamentals could force traders to look at the technical picture. The market is in a position to test key value areas at $71.34 to $63.03.

Aggressive counter-trend buyers could step in to stop the price slide on a test of this areas. They may try to form a support base, which would be a bullish development.

This week’s plunge is a surprise due to supportive news out of China. China, On Wednesday, the world’s biggest crude importer, announced the most sweeping changes to its anti-COVID regime since the pandemic began. This comes on top of the news that the country’s crude oil imports in November rose 12% from a year earlier to their highest level in 10 months.

The wildcard this week will be the Federal Reserve’s interest rate decision on Dec. 14. Traders expect the Fed to raise its benchmark rate by 50 basis points. However, no one is certain how high the Fed will take rates and how long will they keep raising.

Traders fear the Fed may overshoot its targets and push the economy into recession which would be negative for crude oil demand.