Unseasonal inventory plunge has crude oil bulls eyeing upside. Jan 25th 2024

Traders have been searching for evidence of market tightness in crude oil for months, wondering when production and export cuts from OPEC and Russia would filter through to visible inventories. Perhaps they just found it.

By :David Scutt, Market Analyst

  • Global crude oil inventories have fallen sharply to start 2024
  • While freezing weather in the US partially explains the draw, it’s not the only factor
  • Crude continues to find willing buyers on dips below the 200-week moving average

Traders have been searching for evidence of market tightness in crude oil for months, wondering when production and export cuts from OPEC and Russia would filter through to visible inventories. Perhaps we’ve just seen the first sign it’s starting to take effect, especially with economic activity holding up in most parts of the world.

Global crude inventories suddenly nosedive

The chart below comes from Robert Rennie, Head of Commodity and Carbon Strategy at Australia’s Westpac Bank.

Source: Westpac, X

It shows global inventories, especially for crude, have seen an unseasonal dip to start 2024, tumbling towards the lowest levels seen in the past five years.

For context, part of the decline is weather-related with freezing conditions in the United States over the past fortnight reaping havoc crude production in the Permian basin, along with demand for downstream products lie gasoline and diesel. According to data from the US Energy Information Administration (EIA), US crude stockpiles fell by 9.2 million barrels in the week ending January 19, more than four times larger than markets had expected.

However, as Robert noted in social media post, the disruptions were not the only factor behind the steep drop in global inventories last week.

And it’s not just freezing US weather

“Our weekly global crude plus liquids inventory model suggests that the drop in US crude inventory is not an isolated story,” he said. “Crude stocks in Europe and China have also dropped noticeably in the last week too suggesting that trade disruptions from the Middle East conflict plus OPEC+ supply cuts are also factors at work here.”

With economic activity holding up in most major economies based on the latest S&P Global flash PMIs released this week, it builds the case for upside for crude prices should evidence of tightness continue to accumulate. Looking over the past year, there’s also growing technical evidence to suggest crude prices may be in the process of bottoming.

Crude continues to find buyers below the 200wma

The weekly crude oil chart reveals dips below the 200-week moving average continue to be bought, extending the run of failing to close below this level for more than nine months. So far this year, the price has logged higher lows every week, and remains on track to so again based on the current chart candle. Upside momentum also looks to be building with RSI trending higher while MACD may soon crossover from below. Given the setup, it comes across as a potential longer-term trade.

The low last week was around $70.50, providing a potential location for a stop-loss order for those considering longs. On the topside, crude has respected the 50-week moving average on numerous occasions recently, so it would be ideal to see a pullback to help improve the risk-reward of the trade. Above the 50wma, $79.80 acted as both support and resistance in 2023 while downtrend resistance from the highs set in 2022 kicks in around $83. If crude were to reach the latter, it would provide an opportunity to either close out or hold/add depending on whether we see a sustained break.

– Written by David Scutt

Follow David on Twitter @scutty

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