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Slower Economic Activity Slips into the Oil Markets

Stavros Tousios | Wednesday 11 January 2023

In the first week of 2023, US crude stockpiles surged well above expectations by 14.8M, according to data from the American Petroleum Institute (API). In addition, distillate stockpiles, including heating oil (HO), rose by 1.1M barrels, more than doubling expectations for the same week. In the aftermath, the record crude oil build weakened WTI (CL) prices by 54 cents to $74.58/bbl.

This isn't considered anything more than steady, but it might be due to the preliminary API report coming out a day ahead of the heavier official stockpile report. This will be issued by the US Energy Information Administration (EIA) later today, Wednesday, January 11.

Slower Economic Activity Slips into the Oil Markets

WTI Moves as Investors Weigh on Oil Demand

Oil prices have been on the backfoot recently for a variety of reasons, including worries that interest rate hikes by the Fed aimed at slowing inflation would trigger a recession. Slower economic activity would also be expected to slow demand for oil. Beyond the US, Europe is also seen at risk of an economic slowdown, and China is still dealing with the economic fallout of the spread of Covid. Taken together, these factors may have been contributing to the prevailing bearish sentiment in the oil market.  

From a technical perspective, the price structure of the futures contract for both the US-based WTI and global Brent (EB) remains in a condition known as "contango". That is when the spot price of a commodity is lower than the futures price, producing an upward-sloping forward curve. It usually happens when investors expect an asset to rise over time. This bearish contango structure in the near term may signal that there is an ample supply of crude.

Supply Situation Worsens as SPR Dips to Record Low

Crude prices have had a difficult start to the year, falling 10% in the first few days after the holidays as worries increased that the global economy was heading into a recession. During the first week of the year, the US Strategic Petroleum Reserve (SPR) released 0.8M barrels, reducing the total reserves to 371M barrels. That's the lowest amount of crude oil in reserve since the end of 1983. Meanwhile, refiners are still trying to restart after being forced to shut due to a bout of cold weather in December.

The US has ramped up crude oil production to 12.1M bpd, bringing average production at the end of 2022 to increase by 0.4M bpd over the prior year and 1M bpd short of peak production registered just at the beginning of the covid pandemic. Meanwhile, OPEC production is expected to have increased by 1.9M bpd in the last year. This compares to an estimated increase in global demand of 2.5M bpd for the same period.

China Prepares for Expected Rise in Oil Demand

On Monday, China issued a new round of import quotas, which is seen as suggesting that the world's largest crude importer is getting ready for expected higher demand. China's move away from zero-covid is seen as a sign that the country's economy will return to growth. Accordingly, Chinese stock prices have reflected this bullish outlook, with the MSCI Asia Pacific Index (MSCI) jumping 2.5% on Tuesday, January 10th, capping almost 25% growth since bottoming out in October. On Sunday, China lifted the last remaining covid restrictions, and most economists expect the country's GDP to rebound in the second quarter.

Moreover, while the World Bank seems to be less optimistic on the economic growth front, forecasting just 1.7% global growth in 2023 its projections show China substantially outperforming the world once the covid situation is over. The World Bank expects China's economy to grow 4.3% this year after showing just 2.7% growth in 2022. Additionally, the World Bank expects crude prices to average around $88/bbl this year.  (Source:Reuters)


If the US Energy Information Administration confirms the API report, it would be the largest build in inventories since February 2021. It comes in the context of general bearishness associated with monetary policy. Investors may be keenly focused on the economic outlook and moves by the Fed, which is expected to be the focus for the market after the DOE's (Department of Energy) stockpile report. 

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