By Barani Krishnan
Investing.com -- A bird in the hand is worth two in the bush, so the saying goes. Some in the oil market got that on Friday as fresh anxieties over inflation and rate hikes made them exit their long positions in crude after becoming wary about a supply glut taking shape from weeks and weeks of inventory builds reported by the U.S. government.
But as they sold - possibly to re-enter when demand was better - others bought the dips as the market went down, defiant that the situation in crude will soon sort itself out, thanks to that one magic word: China.
Since Beijing announced at the start of the year that it was doing away with all COVID controls, the long-oil world has been salivating over what that could mean for demand in the largest importer of the commodity.
Even the Paris-based International Energy Agency, which looks after the interest of oil-consuming nations, has been waxing lyrical about how Chinese buying could exponentially remake this year’s oil market.
The IEA forecast an additional 500,000 barrels per day of consumption from China this year that would take global oil demand to a record high. “Global oil demand is set to rise by 1.9 million bpd in 2023, to a record 101.7M bpd, with nearly half the gain from China following the lifting of its COVID restrictions,” the agency said in its January market report.
Mind you, this came from an entity typically labeled by oil bulls as the “perma-bear” of demand - an unfortunate tag, no doubt, given the IEA’s bias towards consumers, who, unsurprisingly, want the lowest possible energy prices at any time.
The problem though with what the long side of oil wants is there has to be enough hard data to support it.
Analysts say Chinese import data supporting a major oil rally will likely not emerge for at least another two weeks. Meanwhile, latest available data showed the world’s largest crude importer bought 10.98 million bpd, or barrels per day, in January, down from December's 11.37M bpd and November's 11.42M bpd.
The government in Beijing declared a “decisive victory” on Friday in its battle against COVID, claiming it had created “a miracle in the history of human civilization” in successfully steering China through the global pandemic. Analysts said that without hard numbers, such statements could only have fleeting impact.
“It is going to be hard for oil to break out here until we see clear signs that China’s reopening is reaching the next level,” said Ed Moya, analyst at online trading platform OANDA.
Simply put, no megaphone wielded by the IEA will sustain a rally toward $90 a barrel, until those Chinese import numbers come along. Also, Russia’s announcement of production cuts - in retaliation to Western sanctions on its oil - hasn’t been taken seriously enough by the market.
On the contrary, what should matter to the market is what’s reported by the Energy Information Administration, the U.S. counterpart of the IEA. For eight straight weeks, the EIA has reported higher inventories of crude that have added nearly 51M barrels to supply.
The latest weekly addition was an eye-watering 16.3M (NYSE:MMM) barrels which the EIA said was the fourth largest in its history of reporting on U.S. oil supply-demand.
Not only crude inventories went up last week. Gasoline stockpiles have risen without stopping for seven weeks, adding around 19M million to supply. In fact, gasoline inventories have been on an uptrend since November, gaining in 12 of the past 14 weeks to bring forth more than 36 million barrels.
Oil bulls have explained away the mammoth builds in crude to data irregularities at the EIA, as well as both scheduled maintenance and unplanned outages at U.S. refineries, which they say have led to a backlog in oil movement.
U.S. crude oil refinery inputs averaged 15M bpd during the week ended Feb. 10 - some 383,000 bpd less than the previous week’s average, the EIA said. It added that refineries operated at 86.5% of their operable capacity last week. Typically, runs at this time of year are about 90% or more.
Reuters, meanwhile, cited “unusually large crude oil supply adjustment” in EIA data that it said contributed to the builds of late - somewhat backing the contention of oil bulls.
"It's the worst kind of build that you can possibly have. It's all about the...adjustment number. There's no getting around that," Bob Yawger, director of energy futures at Mizuho, said in comments carried by Reuters.
The EIA has not commented yet on the so-called adjustments in data and some analysts said the builds it reported were real to an extent, not a figment of the agency’s imagination.
Even if the supply climb was "primarily due to a data adjustment, it continues to suggest markets face a near-term oversupply of crude as refiners have been slow to respond," said Robbie Fraser, manager, global research & analytics at Schneider Electric, in a daily note.
In the meantime, markets are caught in a new tug-of-war between U.S. inflation and growth.
Traders of most risk assets - except possibly those in oil - have been spooked all week by one data point after indicating stubbornly higher inflation despite a year of rate hikes by the Federal Reserve.
U.S. wholesale prices, one of the key determinants of inflation, rose their most in seven months in January, the Labor Department reported on Thursday.
That was after Tuesday's report on consumer prices that again suggested stickier-than-thought inflation.
Since the updated data on inflation emerged, Federal Reserve officials have been girding for an extended period of high interest rates, including a return to a 50-basis point hike in March, saying creeping inflation makes the 25-basis point quantum that the central bank agreed on this month untenable.
“We need to continue rate hikes until we see more progress,” Fed Governor Michelle Bowman said Friday. “Inflation is still far too high. Your guess is as good as mine as to what happens next in the economy.” Richmond Fed President Tom Barkin concurred, saying controlling inflation would require more rate increases. “How many, we'll have to see," he added.
The comments by Bowman and Barkin came on the heels of more rate warnings earlier in the week from other officials at the central bank.
Cleveland Fed chief Loretta Mester said Thursday U.S. interest rates need to rise to above 5% and remain there an extended time in order to bring inflation down meaningfully.
St. Louis Fed President James Bullard, often viewed as the most hawkish official at the central bank, also said on Thursday he hadn’t been in favor of lowering the quantum of rate hikes - something that happened the last two months - until inflation was under better control.
Bullard added that he would support a 50-basis point hike at the Fed’s next rate decision on March 22, after the 25-basis point increase on February 1.
Former Treasury Secretary Summers, in rounding up the Fed rhetoric, said there’s a risk of the central bank “hitting the brakes very, very hard”.
The Fed added 450 basis points to rates since March via eight hikes, in its bid to control runaway inflation. Rates currently stand at a peak of 4.75%. Inflation, as measured by the Consumer Price Index, grew by an annualized rate of 6.4% in January. The Fed’s target for inflation, meanwhile, stands at 2% per year.
Rate expectations for the Fed’s March 22 policy meeting, monitored by foreign exchange traders, remained at 25 basis points on Friday, though that could change with the increasing calls for tighter policing from the central bank’s hawks.
Thus, Friday’s reversal of the upside seen earlier this week in crude prices was important, as it indicated that the oil trade was finally falling in line with other markets. Yet, the drop at settlement was just under 3%, compared with the intraday slump of around 5%. That meant that even as the market was falling, there were still longs rushing in to buy, probably in chase of the China dream.
So, let’s revisit the birds-and-bush analogy explored at the start: The birds might be more easily found on the short side of oil now, even if China promises to be a gigantic bush to hold many of them.
Oil: Market Settlements and Outlook
London-traded Brent crude for March delivery did a final trade of $83.15. It settled the session down $2.14, or 2.5%, at $83. Brent’s intraday bottom was $81.81, a low since Feb. 6. For the week, the global crude benchmark was down 4%. Brent has slid in three of the past four weeks, losing more than 5% in that period.
New York-traded West Texas Intermediate, or WTI, crude for March did a final trade of $76.33 on Friday. It settled the regular session down $2.15, or 2.7%, to $76.27. WTI’s session low of $75.08 marked a near two-week bottom. For the week, the U.S. crude benchmark was down 4.4%. WTI has fallen in three of the past four weeks, losing nearly 7% in that stretch.
“For WTI, $79 had been an active resistance,” said Sunil Kumar Dixit, chief technical strategist at SKCharting.com. “Weakness below $77.50 could add to bearish pressure, pushing it further down towards $75.50.”
Going into the week ahead, oil needs triggers to make a sustained break, he said.
“A break below $75 may cause a further drop to the short-term support of 72.20, below which a further decline towards $70.10 is likely,” said Dixit.
He added that consolidation above $77.50 could prompt a quick retest of $80.50, above which further recovery can be witnessed toward the $82.50 resistance.
On the higher side, the 100-week Simple Moving Average of $83.75 continues to pose a challenge, while on the downside, bears have not given up hope for an assault on the 200-week SMA of $65.90.
Natural gas: Market Settlements and Outlook
The front-month March gas contract on the New York Mercantile Exchange’s Henry Hub did a final trade of $2.263 per mmBtu, or metric million British thermal units, on Friday.
It settled the official session at $2.2750, down 11.4 cents, or 4.8% on the day. For the week, it fell 9.5%.
Except for last week’s rise of 4.3%, natural gas has fallen without stop since the week ended Dec. 9, losing 65% in the process.
More importantly, Friday's low of $2.221 marked a new 2-½ year bottom for a front month contract on the Henry Hub. If the short-sellers in gas want to take out the $2 support, they would have to take the contract below the Sept. 28, 2020 bottom of $2.02.
Dixit of SKCharting noted that gas has broken below the previous week's low of $2.35, meaning its “way is open” for further losses.
“The near-term target will be $2.15 and $2.02, failing which the bears would target $1.90 and $1.75.”
On the flip side, gas prices can start a bounce back from anywhere between $2.2-$2.0 and $1.90-$1.70, Dixit said.
He said the rebound should be signaled by a weekly closing above the 5-week Exponential Moving Average of $2.68, followed by a better affirmation of a weekly close above $3.0- $3.30-$3.50.
Gold: Market Settlements and Outlook
Gold for April delivery on New York’s Comex did a final trade of $1,851.45 on Friday. It settled the regular session at $1,850.20 an ounce, down $1.60, or 0.01% on the day. For the week, the benchmark gold futures contract lost $12.60, or 0.7%.
The spot price of gold, more closely followed than futures by some traders, settled at $1,843, up $6.51 or 0.4%.
Dixit of SKCharting said the trend in spot gold appeared bearish in the short term. “It will stay so if prices sustain below the critical barrier of $1,878.”
“Further from this point, even if gold extends its short-term upside towards $1,855-$1,860, it could again attract sellers aiming to dig deeper into the $1,800-$1,788 territory.”
On the higher side, if gold manages to make a sustained break above the $1,845-$1,850 resistance zone, further limited upside might be witnessed towards $1,858-$1,868 - a level that needs to be cleared for a retest of the $1,878 critical barrier.
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.