Oil Price Forecast / Update: API Reports Large Stockpile Draw Ahead of EIA Data

Highlights

• U.S. crude oil stocks fall by 6.1M bbls
• Gasoline inventories down 1.9M bbls, distillate inventories up 1.7M bbls
• Economic concerns outweigh short-term consumption gains

Overview

On Wednesday, U.S. benchmark WTI crude oil prices are lower just before the weekly government inventories report at 14:30 GMT. Earlier, prices had risen due to falling U.S. inventories, which were reported by the American Petroleum Institute (API). However, the gains were short-lived as traders evaluated this week’s disappointing U.S. economic data, which raised concerns about a recession in the world’s largest economy.

At 12:50 GMT, WTI Oil is trading $76.40, down $0.17 or -0.22%. On Tuesday, the United States Oil Fund ETF (USO) settled at $67.64, down $1.61 or -2.33%.

API:  US Crude Stocks Drop Sharply

According to market sources citing American Petroleum Institute (API) figures on Tuesday, U.S. crude oil stocks dropped by approximately 6.1 million barrels during the week ended April 21. This exceeded analysts’ expectations of a decline of about 1.5 million barrels in crude inventories. Gasoline inventories decreased by 1.9 million barrels, while distillate inventories rose by 1.7 million barrels, as per the sources. The official stockpiles data from the U.S. government will be released on Wednesday.

WTI Futures Enter Backwardation

Since mid-March, U.S. crude oil stockpiles have been decreasing as refineries have boosted production to meet the increasing demand for gasoline ahead of the summer peak, which starts in May. As a result, WTI futures prices have entered backwardation, where prompt futures are higher than later-dated futures, reflecting the higher refinery demand.

Prices Drop to Nearly Pre-OPEC Output Cut Levels

On Tuesday, oil prices experienced a drop of over 2%, bringing them close to the level before the announcement made by the Organization of the Petroleum Exporting Countries (OPEC) and its producer allies, including Russia, collectively known as OPEC+, regarding an additional output reduction until the end of this year.

Economy Worries Stifle Fuel Demand

Despite the API data pushing the market higher on Wednesday, concerns about the economy and expectations of further interest rate hikes that could curtail fuel demand growth are countering any signs of short-term consumption gains. U.S. consumer confidence plummeted to a nine-month low in April due to mounting worries about the future, increasing the risk of the economy falling into a recession this year. This data supports claims that the U.S. economy is nearing a recession.

Rate Hike Fears Pressure Energy Demand

Investors are also worried that potential interest rate hikes by inflation-fighting central banks may slow economic growth and negatively impact energy demand in the United States, Britain, and the European Union. The U.S. Federal Reserve, the Bank of England, and the European Central Bank are all expected to raise rates in their upcoming meetings, with the Fed meeting scheduled for May 2-3.

Technical Analysis

From a daily technical viewpoint, WTI Oil is trading on the strong side of its daily pivot at $73.89, but under the R1 level at $82.53. The long-term technicals appear to be in favor of an upside move, but the short-term outlook indicates potential weakness.

A sustained move over R1 at $82.53 will indicate the buying is getting stronger. This could lead to a near-term acceleration to the upside. However, a sustained move under R1 will indicate the short-term selling pressure is getting stronger with the pivot at $73.89 the next major target.

Since the trend is up, new buyers are likely to show up on a break into $73.89 since this is considered a value level.

For a look at all of today’s economic events, check out our economic calendar.