When production cuts and trade talks are out of sight, U.S. crude inventories will matter. And the forecasts for that aren’t looking too great.
Prices of U.S. West Texas Intermediate and London’s Brent oil fell for a second straight day on Wednesday after forecasts were for a decline of 42,000 barrels last week in U.S. crude stockpiles versus the 2.7-million drop in the week to Jan. 11.The U.S. Energy Information Administration will report official inventory numbers on Thursday.
Brent, the global oil benchmark, slipped by 33 cents, or 0.5%, to $61.17, after losing 2% in the previous session.
Crude prices initially rose on Wednesday on hopes that China and Japan would resort to stimulus measures to avert a slowdown in their economies. As the day progressed, however, the market turned south on worries about U.S. oil inventories.
“The market continues to be caught between what appears to be a product glut with emphasis on gasoline and too much crude production,” said Scott Shelton, energy futures broker and commentator with ICAP (LON:NXGN) in Durham, N.C.
The EIA said last week that gasoline inventories rose by 7.5 million barrels, compared to expectations for a build of 2.77 million barrels, while distillate stockpiles increased by 2.97 million barrels, compared to forecasts for a gain of 1.57 million.
After ending 2018 in free-fall, oil is off to its best start for a year since 2001, gaining roughly 18% since the start of January on production cuts by the world’s big exporters, notably Saudia Arabia.
But the market has turned volatile lately on worries about a possible slowing in the Chinese and global economies this year, and new record production rates forecast next year for U.S. crude output. Those gains would easily make it the world’s top producer.
Wednesday’s market was also depressed by reports about an EU arrangement that would let Iran bypass U.S. sanctions on its oil. The European Union was set to launch a mechanism that would facilitate non-dollar trade with Iran, skirting the U.S. sanctions, Reuters quoted diplomats as saying.
Even news of possible U.S. sanctions against Venezuela — a development that ought to push oil prices higher — didn’t help crude prices rebound.
Reuters reported that the Trump administration could impose new restrictions on Caracas’ vital oil sector as soon as this week to punish President Nicolas Maduro’s government amid street protests unfolding in the Latin American country.
A slide in Wall Street shares also weighed on oil.
“Risk appetite has turned a bit sour,” Fawad Razaqzada, analyst at forex.com, said.
“Concerns over economic growth is back after those disappointing Chinese figures over the weekend,” Razaqzada added. China posted its lowest annual economic growth in nearly 30 years this week, as well as factory orders indicating a further loss in activity and jobs.
On the U.S.-Sino trade talks, the Financial Times reported that Washington rejected an offer by two Chinese vice-ministers to travel to the U.S. this week for preparatory trade talks because of a lack of progress on two key issues, but White House economic adviser Larry Kudlow denied that report.
President Donald Trump’s no-show at the World Economic Forum in Davos, Switzerland, due to the partial U.S. government shutdown, also snuffed out hopes that the trade talks would make some advanced progress this week. Trump and high-ranking U.S. officials had been expected to meet the Chinese delegation to the forum ahead of the 90-day trade truce ending March 1.
In Davos, a senior Russian official said his country shouldn’t get into a price war with shale to try to force the U.S. out of the global market.
“For U.S. shale production to go down, you need oil prices at $40 per barrel and below,” said Kirill Dmitriev, who heads the state-backed Russian Direct Investment Fund. “That is not healthy for the Russian economy.