Oil prices continued to rise on Thursday with Brent breaking $67/bbl, returning to the level where it traded in January 2020. Powell's speech this week, in which he said about the need to maintain significant monetary easing, helped the oil rally. Additional reports from the US indicated that oil market tightening gathers pace. As it often happened before, traders could easily miss the moment where the market will already start to suffer from undersupply. That is why oil prices are rising in an unabated fashion.
The US EIA released its weekly oil inventories report yesterday. One of the key indicators, commercial crude oil reserves, showed an increase of 1.29 million barrels. The rise in inventories is usually associated with a bearish price response. However, the market discounted the reading despite expecting a 5.19 million barrels decline. Why? It may seem that US oil producers quickly restored output, which led to an increase in stockpiles. However, this is not the case. In fact, the level of refinery capacity utilization decreased over the week by 14.5% to 68.6%, complicating the clearance of inventories:
This utilization rate is at its lowest level since May 2020. Therefore, even a moderate recovery in production could have a significant effect on inventories. That’s why the release of the data could have a positive effect on the market, despite the negative change in headline reading.
Gasoline reserves rose, indicating that petroleum demand continues to suffer as cold weather obviously hampers mobility. It’s also a moderately bullish development for WTI prices.
Speaking about the upcoming releases of EIA reports, we can expect that the upward trend in inventories will persist for some time. This is because production has shown that it can quickly recover, but the refinery's refining capacity is not. The growth of stockpiles is likely to have minimal impact on the market.
More important for the oil market is the upcoming meeting between OPEC and Russia to discuss the current deal on output curbs. Oil demand is recovering, but the OPEC + deal limits ability of producers to ramp up output, what results in confident growth of prices. Producers, especially the Russian Federation, have a great incentive to gradually lift curbs. Such expectations could drive pullback in prices ahead of the March 4th meeting and there is a risk for some meaningful correction in the market. The situation contributes precisely to sell on rumors (rather than buy), as the risks are clearly skewed in favor of increasing production in response to strengthening demand which should have negative impact on prices or at least make the rally less pronounced.
Technical setup also favors meaningful bearish oil pullback ahead of the meeting:
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