Crude oil and crude ETFs fell again on Friday, after slipping the prior day amid industry data that revealed a surprise increase in U.S. crude inventories, regenerating fresh pandemic-related demand concerns. Optimism over President Biden’s stimulus package somewhat tempered the drop in prices.
U.S. West Texas Intermediate (WTI) crude futures declined $1.15 or 2.16%, to $51.98 a barrel, after climbing earlier in the week on expectations of an expansive coronavirus relief package under President Biden. International benchmark Brent crude futures also dropped as well.
On Thursday, data showed that U.S. crude oil inventories climbed 2.6 million barrels in the week leading up to Jan. 15, according to data from the American Petroleum Institute.
“Oil prices look a tad vulnerable to potential profit-taking after U.S. crude stockpiles bearishly rose 2.56 million against consensus draw,” Axi chief market strategist Stephen Innes said in a note to clients.
Demand Concerns Add to Supply Woes
Meanwhile, JPMorgan Chase & Co. slashed demand estimates for China as lockdowns continued, and a vaccine supply shortage has led New York City to reschedule more than 20,000 appointments.
“Holding the market back are also persistent worries over demand,” said Warren Patterson, head of commodities strategy at ING, adding that concerns have grown, with a rise in COVID-19 cases in China leading to targeted lockdowns.
“The government will be keen to get any outbreaks under control, particularly with the Chinese New Year fast approaching,” he said.
With crude trading close to its March 2020 levels, there is some concern that the commodity may be reaching resistance, at least in the near-term.
“At these price levels, many people in the market are considering the downside risk,” said Bart Melek, head of global commodity strategy at TD Securities. “We continue to have concerns the oil market may have gone a little too high given where demand is likely to go” in the near term.
The Biden administration has also decided to limit carbon emissions. One of his first actions as president, was announcing America’s return to the Paris climate accord. He also overturned a permit for the Keystone XL oil pipeline project from Canada.
For longer term bullish crude investors, the decline could offer opportunity for purchase using ETFs like the United States Oil Fund (USO) or the ProShares Ultra Bloomberg Crude Oil (UCO).
“Long-term oriented investors have used set-backs to add exposure to assets which benefit in a post-Covid world,” said Giovanni Staunovo, an analyst at UBS Group AG. “Despite still rising cases and new mobility restrictions, petroleum inventories have kept falling, indicating that the oil market remains undersupplied.”
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