On Friday, West Texas Intermediate (WTI) crude oil prices crashed. Probing fresh sellers came in during the Asian trading session, deepening the decline. After a big runup earlier this week, WTI is back to just under the $58.00 threshold. As of this writing, it’s down over 0.80%. This drop occurs in a context where market actors are still adjusting to changes in the supply and demand balance.
On Wednesday, WTI shot up dramatically by more than $3+. That increase came on the heels of US government data released Wednesday, showing a bigger-than-expected decline in oil inventories. As we’ve anticipated, the report today showed a much larger build of 3.8 million barrels for the week ending January 2. Such a drop would be the largest since late October. WTI had a hard time keeping that high horse, as the dark specter of rising global supplies threatened to overtake WTI’s prospects.
Factors Influencing WTI Prices
One major reason for the back-and-forth in WTI prices is the dual impact of geopolitics and market sentiment. Aggressive short-covering and other positioning reflect that risk as traders respond to rising tensions and sand supply disruptions. Speculation surrounding US control over Venezuela’s state-run oil company, Petróleos de Venezuela SA, has raised concerns about how increased production from this region could impact global oil supply.
Regardless of the breakout rally, WTI prices still closed capped under the critical 50-day Simple Moving Average (SMA) resistance barrier. This technical hurdle has long been seen by traders as the biggest sticking point. Its persisting influence over price action indicates a longer lasting and more fundamental market anxiety. Weakness and a lack of follow-through on Wednesday’s gains could be a sign that investors are wary of outpacing price movements going forward.
The Role of Inventory Reports
Weekly oil inventory reports published by both the American Petroleum Institute (API) and the Energy Information Administration (EIA) play a crucial role in shaping WTI prices. These reports provide important signals about the overall health of the oil market. Traders can leverage this type of information to determine how much supply exists and better calibrate their plans. That surprise drop in inventories from the most recent data was a reason for an initial price boost.
With a dramatic pivot in global market sentiment, the future for WTI does not look bright. The possibility of new supply coming online from Venezuela, along with continued geopolitical pressures, creates uncertainty on both sides and means price predictions are not straightforward. Traders are starting to become more aware of the changing landscape. In particular, they’re looking towards data releases such as the US Nonfarm Payrolls (NFP) report for clues to help them decipher the timing of the Federal Reserve’s first rate cut.
Market Outlook
Despite the price surge, market analysts continue to be split on the path ahead for WTI prices. Even as some celebrate the recent inventory drawdown as a green shoot, others warn not to put too much stock in one data point. Unfortunately, the shadowy hand of OPEC+ Given current circumstances, supply worries and economic data will continue to rule short term price action.
WTI continues to see significant selling pressure. Now more than ever, traders need to be vigilant about global developments that could affect supply chains. The current crisis in Venezuela, and what it forebodes for US energy policy, could change that too—with huge consequences on market out workings.