Crude Oil Slumps on Travel Concerns, Forecasted Production Increases
The February crude oil contract CLG23 was down over 2% in trading early Thursday. The selloff followed diminished hopes of a Santa Claus rally in equities. From my colleague Ryan Hinsen: “The Santa Claus Rally incorporates the last 5 trading days of the year and the first two days of January. According to CFRA Research data, these 7 trading days have posted positive returns 75% of the time.” With 2 more days left following today’s action, the market has a way to go to reach 3920 for $SPX, the 20-day SMA.
Beyond equities, concerns about demand weighed on traders. In the East, news on a COVID flareup in China, the world’s second-largest oil consumer, could lead to more lockdowns and/or travel restrictions. Following reports out of Italy that half of passengers on recent flights from China tested positive for COVID, countries are considering mandatory testing and quarantines. Italy was the first to announce new rules, with Japan and Taiwan announcing plans to start testing arrivals this weekend. Japan meanwhile is set to import a crude oil shipment from Russia as the government looks to ensure supplies of both oil and natural gas. The shipment of nearly 800,000 barrels departed the Sakhalin-2 terminal in Russia’s far east on Wednesday. It is Japan’s first shipment of Russian oil since May. Also in Russian oil news, President Vladimir Putin implemented a ban effective February 1 on supplying crude oil to countries that abide by a price cap of $60/barrel for Russian oil. The cap was implemented December 5 as part of sanctions for the war in Ukraine.
On the supply front, the rig count ticked up 3 to 779 last Friday, while showing a significant increase of 193 rigs year-over-year. Crude oil inventories increased by 700,000 barrels from the previous week. The current supply is 6% below the 5-year average for this time of year. The US Energy Information Administration expects 2023 US crude production to increase to 12.34 million barrels/day, up from this year’s average of 11.87 million. Macquarie Group has a forecast for US production of 13.6 million barrels/day, with much of the increase expected to come from independent producers. The EIA forecasts domestic consumption to remain constant at around 8.8 million barrels/day.
The February crude oil contract has sold off for the last few days and touched its 9-day SMA on Thursday. It remains below its 50- and 200-day SMA levels. The MACD remains positive, and the Parabolic SAR is still on the support side. Hightower calculates today’s supports at 77.37 and below that at 76.03, with resistance at 79.99 and 81.26.