Oil Faces Demand Risk Despite Supply Outages

U.S. West Texas Intermediate crude oil futures are trading higher on Friday, clawing back some of this week’s losses in the process. The catalysts behind the early strength are growing concerns over supply tightness in the United States in the wake of the damage from Hurricane Ida and as the possibility of improving U.S.-China trade relations bolstered demand for riskier assets.

China to Release Oil from its Strategic Reserve

Worries over tight supply balances and the Gulf’s offshore oil production are offsetting bearish news from China which hit the market hard on Thursday. In the previous trading session, sellers drove prices off their highs after China announced plans to sell state crude reserves in phases via public auction.

The announced sales will “better stabilize domestic market supply and demand, and effectively guarantee the country’s energy security,” the National Food and Strategic Reserves Administration said, adding that it plans to regularly release and replenish China’s oil reserves.

Hurricane-Driven Energy Losses to Continue for Weeks

Royal Dutch Shell Plc, the largest oil producer in the U.S. Gulf of Mexico, on Thursday canceled some export cargoes due to damage to offshore facilities from Hurricane Ida, signaling energy losses would continue for weeks.

About three-quarters of the Gulf’s offshore oil production remains halted since late August following Ida, one of the most devastating hurricanes for oil companies since back-to-back storms in 2005. Shell and other oil firms warned they could not yet say when full output would resume.

Almost 1.4 million bpd of offshore oil production remains shut and 1 million bpd of refining capacity is also offline. Refineries could fully recover before Gulf output goes. However, imported crude is plentiful, sources told Reuters.

EIA Reports Drop in U.S. Crude, Fuel Stocks

U.S. crude and fuel stocks all slumped last week as Hurricane Ida shut most of the country’s offshore production and numerous refineries, the Energy Information Administration said on Thursday.

Analysts had anticipated a sharp decline in inventories across all major categories, as offshore platforms were unable to deliver crude to the U.S. mainland, and as several refiners ceased operations. Roughly three-quarters of Gulf of Mexico offshore production is still closed, Reuters reported.

Crude inventories fell by 1.5 million barrels in the week to September 3 to 423.9 million barrels, compared with analysts’ expectations in a Reuters poll for a 4.6 million-barrel drop. Stocks are now at levels not seen since September 2019.

U.S. gasoline stocks fell by 7.2 million barrels, exceeding expectations for a 3.4 million-barrel drop.

Distillate stockpiles, which include diesel and heating oil, fell by 3.1 million barrels, versus expectations for a 2.6 million-barrel drop.

Refinery Crude Runs Pressured

The EIA also reported refinery crude runs fell by 1.6 million barrels per day in the last week. Refinery utilization rates fell by 9.4 percentage points, largely due to the shutdown of refiners in the U.S. Gulf. That region of the country saw overall utilization fall to 75.7% from 92.4% in the previous week, while the Midwest experienced a less dramatic drawdown of refining capacity.

U.S. weekly production fell to 10 million barrels per day from 11.5 million bpd the week earlier, due to the shutdown of offshore platforms.

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart. A trade through $72.61 will signal a resumption of the uptrend. A move through $61.11 will change the main trend to down.

The minor trend is down. However, momentum is trending higher following the confirmation of the closing price reversal bottom from the week-ending August 27. The minor trend will change to up on a trade through $71.85.

Retracement Level Analysis

The minor range is $72.61 to $61.11. Its retracement zone at $66.86 to $68.22 is currently being tested.

The short-term range is $55.54 to $72.61. Its retracement zone at $64.08 to $62.06 is support.

The main range is $37.70 to $72.61. If the main trend changes to down then its retracement zone at $55.16 to $51.04 will become the primary downside target and value area.

Weekly Technical Forecast

The direction of the December WTI crude oil market the week-ending September 17 will be determined by trader reaction to $68.22 to $66.86. Look for a neutral tone if prices hold between these levels.

Bullish Scenario

A sustained move over $68.22 will indicate the presence of buyers. If this move is able to generate enough upside momentum then look for a test of the minor top at $71.85, followed by the main top at $72.61. Taking out this level could trigger an acceleration to the upside with $74.77 the next target.

Bearish Scenario

A sustained move under $66.86 will signal the presence of sellers. If this move generates enough downside momentum then look for the selling to possibly extend into the short-term retracement zone at $64.08 to $62.06.

A failure at $62.06 could lead to a test of the main bottom at $61.11. Taking out this level will change the main trend to down and could trigger an acceleration to the downside with $55.54 to $55.16 the next likely target area.

Short-Term Outlook

The technical chart pattern suggests crude oil is developing an upside bias after forming a solid week-long support base on the daily chart.

Slow progress by U.S. Gulf of Mexico producers in restoring output after Hurricane Ida is expected to continue to provide support as well as strong gasoline demand. The market could face headwinds, however, from a stronger U.S. Dollar.

Although crude oil is in a position to close higher for the week, mostly on supply concerns, buyers still seem a little tentative about demand, especially after Saudi Arabia cut prices to Asia earlier in the week. The Saudi’s usually don’t cut prices unless they see a weakening demand picture.

Buyers are likely to be selective about their entries into new positions this week as they continue to assess lingering issues like the uncertainty over the strength of the recovery in Asia and the United States, rising global coronavirus cases and seasonal demand tendencies.

Keep in mind that prices could turn lower rather quickly if substantial progress is made in the repairs to the storm-damaged offshore facilities.