Inventories Surplus & Wuhan Virus Pressure Crude

Inventories Back Up

Crude prices have been back under pressure this week. The latest report from the Energy Information Administration reflected an unexpected build in US crude stores last week. The EIA reported that US crude stores rose by 3.5 million barrels in the week ending January 24^th. This was far above the 1.4 million barrels projected by analysts. It was also contrary to the 4 million barrel increase reported by the API just a day earlier.

Gasoline Inventories Rise

The report also showed that gasoline inventories were higher last by 1.2 million barrels. Although, this was a little lower than the 1.7 million barrel increase forecast by the market. Distillate stockpiles were actually seen lower over the week by 1.3 million barrels. However, this was not as deep as the 1.6 million barrel decline forecast ahead of the release.

Wuhan Virus Fears Still Weighing On Sentiment

Crude prices have been under heavy selling pressure all week as demand fears linked to the Wuhan virus continue to weigh on sentiment. During the SARS outbreak of 2003, crude demand was knocked sharply lower. Traders are speculating that a similar dynamic will play out this time. Indeed, this latest report from the EIA adds weight to that view and keeps the near term outlook tilted to the downside for crude.

However, looking further out, there are some encouraging factors for crude. The signing of the US/China trade deal means that talks will now move onto the second phase of negotiations, aimed at delivering a phase two deal. Such a deal would likely put a final end to the two-year trade war and would offer a considerable boost for crude-demand expectations.

EIA Forecasts Slowing Of US Crude Production

In its Short Term Energy Outlook for January, the EIA forecasts that US crude production will average 13.3 million barrels per day in 2020. This is up 9% from 2019 levels while 2021 production will average 13.7 million barrels per day, up 3% on this year. The key thing here is that the EIA is forecasting US crude production growth to slow into next year. This should offer some support to crude prices, especially if demand can rebound.

Technical Perspective

The sell-off in crude this week has seen price breaking down beneath the rising trend line from 2018 lows as well as the 55 level. While price has so far found support at the 52.17 level, beneath the broken trend line, focus is on further downside with a move down to 50.65 the next target.