Crude oil prices rose sharply this week, driven by heightened geopolitical risks, economic developments in China, tighter sanctions on Russian exports, and declining feedstock inventories. These factors collectively pushed West Texas Intermediate (WTI) crude oil past the $71 per barrel mark, hitting a weekly high of $71.45. Similarly, Brent crude followed this trajectory with a weekly high of $74.30, narrowing the WTI-Brent spread to -$3.70 per barrel.
However, the oil market’s optimism was tempered by OPEC’s decision to cut its 2025 global demand growth forecast for the fifth consecutive time. Additionally, an increase in US refined product stocks partially offset the bullish momentum in crude prices.
Fundamental Drivers Behind Oil’s Price Movement
- Geopolitical Risk Premium • The successful overthrow of the Assad regime in Syria added fresh geopolitical risks. This development has created uncertainties regarding Iranian and Russian influence in the region. • Increased sanctions by the G7 on Russia’s “shadow” fleet of crude carriers, along with potential sanctions on Iran’s nuclear program, have further strained global oil supply chains.
- Chinese Stimulus Measures China’s government has promised another round of stimulus packages, including rate cuts, in an effort to counteract its slowing economy. Despite this, November’s import data showed a 4% decline from the prior month, painting a mixed picture for demand.
- Strategic Oil Deals India’s Reliance Industries signed a record-breaking crude oil supply deal with Russia’s Rosneft for 500,000 barrels per day over a decade. This agreement underscores India’s critical role in global energy markets and its ability to leverage discounted Russian crude amid Western sanctions.
- US Inventory Data • The US Energy Information Administration (EIA) reported another draw in commercial crude oil inventories, signaling tight supply conditions. • Refined product stocks, however, rose substantially, reflecting increased production capacity. • The Strategic Petroleum Reserve (SPR) saw a modest gain of 0.725 million barrels, bringing the total to 393 million barrels. US oil production climbed to 13.63 million barrels per day, a significant increase from last year’s 13.1 million barrels per day.
Inflation and Its Impact on Oil
The Consumer Price Index (CPI) rose to 2.7% in November, up from 2.6% in October. Similarly, the Producer Price Index (PPI) increased by 0.2% month-over-month and 3.0% over the trailing 12 months. These inflationary pressures are expected to influence Federal Reserve policy, with a rate cut anticipated at its upcoming meeting. However, a stronger US dollar may act as a cap on crude oil’s upward momentum, making it more expensive for holders of other currencies.
Technical Analysis of Oil Markets
- Key Levels for WTI Futures • January 2025 NYMEX WTI futures breached critical technical levels, trading above the 8-, 13-, and 21-day moving averages. This suggests bullish momentum in the short term. • The Relative Strength Index (RSI) is neutral at 56, indicating that the market is neither overbought nor oversold. • Resistance is currently pegged at $71.50 per barrel, with near-term support at $71.15 per barrel.
- Bollinger Bands WTI futures broke past the Upper-Bollinger Band limit of $71.33, typically interpreted as a sell signal. This could suggest a temporary pullback as the market digests recent gains.
Looking Ahead in Oil Markets
The overthrow of the Assad regime in Syria introduces new geopolitical uncertainties. Traders will monitor developments in Iraq, Iran, and the Russian sanctions closely for any supply disruptions. Additionally, the 8-14 day weather forecast suggests a potential increase in heating oil demand in the Northeastern US, which could provide further support to prices.
Natural Gas Market Overview
Natural gas prices have also exhibited significant volatility, with January futures reaching a three-week high. Despite this, a warmer weather outlook tempered gains, keeping prices above the $3.25 mark. The week’s high was $3.56 per million British thermal units (MMBtu), achieved on Thursday, while the low was $3.07 on Tuesday.
Key Drivers of Natural Gas Prices
- Storage Withdrawals • The EIA’s Weekly Natural Gas Storage Report indicated a withdrawal of 190 billion cubic feet (Bcf), significantly higher than the forecast of 165 Bcf and the five-year average of 71 Bcf. • Total storage levels now stand at 3.747 trillion cubic feet (Tcf), narrowing the year-on-year surplus to 1.8% and maintaining a 4.6% surplus over the five-year average.
- Supply and Demand Dynamics • Supply increased by 0.6 billion cubic feet per day (Bcf/d) to 110.5 Bcf/d, up from 109.9 Bcf/d the previous week. • Demand fell to 128.6 Bcf/d from 136.1 Bcf/d, with the largest decline in residential consumption. • Liquefied natural gas (LNG) exports were 14.2 Bcf/d, slightly lower than the prior week’s 14.5 Bcf/d. Exports to Mexico rose to 6.4 Bcf/d from 6.1 Bcf/d.
- European Market Trends European natural gas prices declined due to warmer weather forecasts. EU storage levels are currently 80% full, providing a cushion against potential winter demand spikes. Spot prices for European natural gas were last reported at $12.35/MMBtu, with January delivery contracts trading at $10.35/MMBtu.
Technical Analysis of Natural Gas Markets
- Key Levels for January 2025 Futures • January 2025 NYMEX Henry Hub natural gas futures are trading above the 8-, 13-, and 21-day moving averages, indicating bullish momentum. • Volume is above average at 195,000 contracts, suggesting strong market participation. • The RSI is neutral at 56, with support at $3.20/MMBtu and resistance at $3.50/MMBtu.
Future Outlook for Natural Gas
Reducing the storage surplus remains a key factor in supporting natural gas prices. However, warmer weather forecasts for the next two weeks are expected to dampen demand, particularly in residential heating. Regions such as the Southeastern and Middle Atlantic US may see some localized demand increases.
Conclusion: Energy Markets at a Crossroads
The oil and natural gas markets remain highly dynamic, influenced by a confluence of geopolitical, economic, and technical factors. Crude oil prices have surged on geopolitical tensions and supply constraints but face headwinds from OPEC’s bearish demand forecasts and rising US refined product stocks. Meanwhile, natural gas markets are navigating the dual pressures of higher-than-expected storage withdrawals and a bearish demand outlook due to warmer weather.
Key Takeaways for Investors:
- Oil Market:
- Monitor geopolitical developments in Syria, Iraq, and Iran for potential supply disruptions.
- Watch for updates on Chinese stimulus measures, which could boost demand.
- Pay attention to technical resistance at $71.50 and support at $71.15 for WTI futures.
- Natural Gas Market:
- Keep an eye on storage data and weather forecasts, as these will heavily influence short-term price movements.
- Track European market trends, particularly storage levels and spot prices.
- Observe key technical levels at $3.20 and $3.50 for January Henry Hub futures.
As markets head into 2025, the interplay between supply-side constraints and demand-side dynamics will continue to dictate price movements. Investors should remain vigilant and adapt their strategies to the evolving landscape.
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