Crude Oil Prices Near 7-Year High on Ukraine Standoff, Falling Cushing Stockpiles

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Crude Oil Prices Near 7-Year High on Ukraine Standoff, Falling Cushing Stockpiles

WTI crude oil prices are hovering at 7-year highs on Thursday as investors mull rising Russia-Ukraine tensions amid a tight market. The EIA reported a decent drop in Cushing inventories, supporting prices.

CRUDE OIL PRICE OUTLOOK:

• Crude oil prices surged to fresh 7-year highs amid heightened Russia-Ukraine tensions
• US Cushing crude inventories fell for three weeks in a row, underscoring a tight market conditions
• The Fed delivered a hawkish-biased message overnight, sending the US Dollar higher

Crude oil prices are hovering at fresh 7-year highs during Wednesday’s APAC mid-day session. WTI is trading above $86 bbl, and Brent is just shy of $90 bbl mark. Prices are well-supported by heightened 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, as 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 tensions between these actors will likely disrupt supply in an already tight market, pushing oil prices even higher.

Oil has also been supported by rising physical demand and falling inventories. The US Energy Information Administration (EIA) reported a 1.823-million-barrel drop in Cushing crude inventories for the week ending 21st January, marking a third consecutive weekly decline.

Looking forward, oil traders will eye next week’s OPEC+ meeting for clues about the oil cartel’s view on the supply-demand relationship. In the previous meeting, the coalition decided to raise its output by 400k barrels per day from February onwards to meet rising demand. They are also facing pressure from the US to unwind some of the pandemic-era production cuts as the US inflation rate hit the highest level in four decades recently. Worries about entrenched inflation spurred central banks to consider tightening monetary policy and encouraged major oil producers to increase output.

During Wednesday’s FOMC meeting, Fed Chair Powell made a hawkish-biased statement, saying that “the committee is of a mind to raise the Fed funds rate at March meeting”. He also said he will not rule out raising rates at every following FOMC meeting, sending the US Dollar index higher and stocks lower. A strong US Dollar may have exerted downward pressure on crude oil prices, limiting their upside potential.

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 RSI oscillator is hovering at the overbought threshold, suggesting that prices may have rallied too fast and thus are vulnerable to a technical pullback.

WTI Crude Oil Price – Daily Chart

 

 

Written by Margaret Yang, Strategist for DailyFX.com. 27th Jan 2022