Crude Oil Prices Extend Gains on Russia-Ukraine Tension, Tight Demand

[MongiIG]

CRUDE OIL PRICE OUTLOOK:

• Crude oil prices climbed amid rising Russia-Ukraine tensions and a tight market condition
• API reported a larger draw in crude inventories, underscoring strong physical demand in North America
• WTI is trending higher within an “Ascending Channel”, extending its upward trajectory

Crude oil prices extended higher during Wednesday’s APAC mid-day session. WTI is trading above $83 bbl, and Brent is just shy of $88 bbl. Prices are well-supported by rising geopolitical tensions between Russia and Ukraine, as the former has massed troops along the border. Fears about the potential for an invasion have rattled investors, leading to a broad pullback in equities and a rally in oil prices.

Ukraine is a crucial transit hub for oil and gas between Russia and the European Union. Ukraine’s transit of Russian crude for export to the EU was 11.9 million metric tons in 2021, according to S&P Global. Therefore, further escalation of tension between these actors will likely disrupt supply in an already tight market, sending oil prices even higher.

Oil prices have been well-supported by rising physical demand this year, with Asian importers paying higher premiums for spot cargoes. Goldman Sachs forecasted $100 bbl for Brent in the third quarter due to strong demand and tight supply. OPEC also foresees robust growth in world oil demand in 2022, predicting the oil market would be “well-supported” throughout the year.

The American Petroleum Institute (API) reported an 872,000-barrels draw in crude inventories for the week ending 21st January, compared to a forecasted 400,000-barrel draw. A larger-than-expected decline in stockpiles will help to underpin prices. US commercial crude inventories have been falling since late October (chart below), suggesting that demand for energy is solid despite the spread of the Omicron variant of Covid-19.

WTI Crude Oil Price vs. DoE Total Crude Inventory

Source: Bloomberg, DailyFX

Technically, WTI is trending higher within a “Ascending Channel” as highlighted on the chart below. The upper and lower bound of the channel may be viewed as immediate resistance and support levels respectively. A key resistance level can be found at around $87.88 – the 200% Fibonacci extension. The MACD indicator is trending higher, suggesting that bullish momentum is still dominating.

WTI Crude Oil Price – Daily Chart

 

 

Written by Margaret Yang, Strategist for DailyFX.com. 26th Jan 2022.