Oil Rally Continues, Oblivious to U.S. Fuel Pile-up

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By Barani Krishnan

Investing.com - The New Year rally in oil showed no signs of slowing on Wednesday as those long the market added another 2% to crude prices after the previous day’s 4% climb. 

U.S. government data, meanwhile, clearly showed a slump in demand for gasoline as the onset of winter reduced driving and the need to fill up auto tanks as much as during the recent holiday stretch. A surge in the Omicron variant of Covid also delayed plans by employers to bring workers back into offices, reducing commuting and other travel that required fuel.

Gasoline stockpiles jumped by 7.96 million barrels last week, the Energy Information Administration said on Wednesday, overwhelming forecasts for a growth of 2.41 million. The latest build added to the previous week’s rise of 10.13-million barrels, which already accounted for the largest weekly surge in gasoline stocks since the height of the coronavirus crisis in April 2020. EIA also shows that gasoline inventories, as a whole, are up by a net of almost 30 million barrels over the past six weeks.

Inventories of distillates, which are refined into diesel for trucks, buses, trains and ships as well as fuel for jets, also swelled more than expected for a second week in a row, rising by 2.54 million barrels against a forecast of 1.76 million. In the previous week, distillate stocks grew by 4.42 million barrels.

“It’s quite perplexing to see these sorts of fuel stockpiles, which we haven’t had for nearly two years since the worst of the coronavirus pandemic,” said John Kilduff, founding partner at New York-based energy hedge fund Again Capital. “It shows that refiners are still turning out gasoline like anything although it’s already winter, with fewer people driving, especially with Omicron cases on the rise.”

US hospitalizations due to coronavirus infections have reached a new record high, data showed on Wednesday, although the Omicron variant itself remains less lethal compared to the original Covid-19 strain and the Delta mutant of the virus. 

U.S. crude stockpiles  on their own saw a stockpile drop of 4.6 million barrels last week, on top of the previous week's drop of 2.1 million. Crude stockpiles have fallen by around 23 million barrels over the past six weeks, accounting somewhat for the current balance of gasoline and distillates in the market.

The West Texas Intermediate benchmark for U.S. crude settled  Wednesday’s trade up $1.42, or 1.8%, at $82.92 per barrel. Following Tuesday’s near 4% gain, WTI is up almost 5% week-to-date and has risen nearly 16% over the past four weeks.

London-traded Brent, the global benchmark for oil, settled up 95 cents, or 1.1%, at $84.67 per barrel. Brent is up more than 3% on the week, with a net gain of around 14% over the past four weeks.

“The macro shorts in oil may be throwing in the towel in the past few days,” analyst Adam Button said in a comment posted on the ForexLive site.  “The rally in oil yesterday and today came on no-news and that's evidence of a squeeze on positioning.”

Button also said he worried about “a sustained drop in Chinese demand due to Omicron”. 

“Much of the world has learned to carry on alongside the virus but more than 20 million people in China are currently in a hard lockdown,” he said. “I expect that number to grow in the coming weeks and that's something that could severely hurt physical demand. From where I stand, that's enough reason to sell oil and return to the sidelines near $85 in WTI.”

Kilduff said it was apparent that the bull narrative had gripped the market to an extent that the fuel component of oil demand was being ignored as longs stayed focused on taking crude prices to $90 a barrel or higher.

“As is the case, when the fall comes, it’ll be as hard or harder than the rally, especially if the demand isn’t backed up quickly enough by hard numbers to the projections made,” Kilduff said.

(Additional reporting by Sam Boughedda)