Signs of a surplus could spook oil markets

Traders will look to reports on storage levels of crude oil to see if supplies are beginning to outstrip demand, analysts said.

Crude prices continue to move further away from late October highs, when West Texas Intermediate, the benchmark U.S crude, flirted with $85 per barrel. WTI lost nearly 3 percent last week to finish the Friday session at $66.26 per barrel.

Factors ranging from concerns about runaway inflation and the emergence of the omicron variant of the coronavirus have led to a decline in demand and sentiment, contributing to the recent slide in oil prices.

Al Salazar, the managing director at energy data firm Enverus, irrational gloom could be surrounding the latest variant, which seems more contagious but less deadly than other strains. Oil markets look to the future, he said, and the future oil market looks to be oversupplied.

“Explanations of the price drop focus on omicron’s demand impact, but pay little attention to supply and the anticipated surplus in the first quarter,” he said.

Economists at the Organization of the Petroleum Exporting Countries expect a surplus starting at the beginning of the year, with increased production from Russia, Canada and Norway.

Salazar said he’ll look at Wednesday’s report from the Energy Information Administration to see how the domestic market is evolving. Last week’s report showed a minor decline in commercial storage levels of crude oil, but, he added, recent data has tended to show that demand is indeed on the decline.

Sentiment that recent supply shortages are turning to surplus gained suport last week. OPEC and its allies, a group known as OPEC+, surprised the market last week by sticking with its plan to add another 400,000 barrels of oil per day to the market come January. Some analysts had expected the group halt its gradual output increases in response to the Biden administration’s release oil from strategic reserves.

In addition, worries about the omicron variant and its impact on economic activity and energy demand also argued for putting less oil on the market.

Paul Hickin, an editorial director at S&P Global Platts in London, said OPEC+ called on member states to stay in open session in an effort to react quickly to any major market swings.

“By signaling to the market it is ready to act at any time,” he said, “OPEC+ is showing profound levels of flexibility and helping to limit the bearish tone.”

From a technical perspective, Ole Hanson, the head of commodity strategy at Danish investment firm Saxo Bank, said he’s curious to see if WTI can break above the 200-day moving average of around $69.50 per barrel. If it does, that could bring in a surge of fresh demand from traders betting on rising prices and add a bullish tone to the market.

The early part of the week may be influenced by headlines and market chatter. Apart from Wednesday’s release of EIA information on commercial storage levels of crude oil, the University of Michigan reports on consumer sentiment.

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