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Downward Bias in Petroleum


The reversal from highs earlier in the week has extended and the February crude contract is likely to test key support down at $72.44 unless today’s EIA report shows crude stocks falling by more than 2.0 million barrels. In fact, overnight the API indicated their crude stocks rose 1.84 million barrels on the week thereby disappointing the trade and calling the Reuters survey prediction of a 2.6-million-barrel decline in EIA crude oil stocks later today into question. While the crude oil market spent the Wednesday trade within the Tuesday trading range, the market tracked in negative territory throughout the session in a sign that improving energy demand expectations have moderated. However, longer-term prices should find support from renewed fears of attacks on tankers in the Red Sea as many shipping companies have indicated they will increase operations again given the protection put in place over the last two weeks. On the other hand, increased demand from the holiday season should now lead to softer demand in the coming two weeks with the bull camp likely needing some sign of colder than normal temperatures to convince the trade to insert a weather premium into prices. In retrospect, energy demand hopes should have been improved by signs of improvement in Chinese corporate earnings and from a longer-term perspective by the falling dollar.


While some cooler temperatures in the forecasts have sparked speculative buying, the largest source of buying fuel will be year-end profit-taking short covering buying from those holding long-held short positions. However, there have been signs of tightening supply from both Europe and the US recently despite unseasonably warm temperatures. In the most recent estimate of European gas in storage, total supply is pegged at 87% of total capacity which is a 13% drop from 100% last month. Furthermore, the sharp drop in supply was seen during relatively mild temperatures which has created hope for the bull camp. However, some of the decline in European storage is the result of disruptions in the Black Sea over the last couple of weeks and not from stronger demand.


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