Crude oil prices drifted lower this week as concerns over a global economic slowdown outweighed supply constraints caused by escalating conflict in the Middle East. Still, ongoing clashes in Yemen and disruptions along key oil transit routes kept prices from falling further.
Oil Prices Drop on Weak Chinese Data, Strong Dollar
Oil prices declined over 1% on Tuesday after Chinese Q4 GDP numbers missed expectations. China’s economy grew just 2.9% in the fourth quarter, down from 3.9% in the third quarter. This sluggish recovery, along with a surging US dollar, put pressure on oil and other commodities.
Brent crude dropped 1.2% to $77 per barrel, while WTI crude fell 1.3% to $72.35 per barrel. Prices had hit multi-year highs last week on Middle East tensions, but some analysts say the conflicts may not impact supply significantly.
“The surprise build in crude oil inventories last week took some of the heat out of the recent bull run,” said Michael Hewson, chief market analyst at CMC Markets UK. “Higher crude supply could drag oil prices lower this year if economic headwinds continue to blow.”
Inventory Data Shows Surprise Build
Adding to the bearish sentiment, the American Petroleum Institute reported an unexpected build in US crude inventories last week. Stockpiles rose by 483,000 barrels against expectations for a 1.8 million barrel draw.
Gasoline inventories also increased more than expected, hinting at weaker demand. This surprise build reinforced concerns of faltering global fuel consumption if economies continue to struggle.
The API numbers often differ from more definitive EIA data, but they were enough to halt oil’s recent rally. WTI crude is still up over 5% in January on supply threats, but its price trajectory now looks less certain.
Middle East Conflict Still Simmers
Yemen’s Houthi rebels launched another attack on a US Navy warship in the Red Sea over the weekend. While the USS Laboon intercepted and destroyed the incoming drones, the continued aggression keeps tensions high.
The Iran-backed Houthis previously targeted Saudi Aramco facilities, raising worries they could attempt to disrupt traffic through the critical Bab el-Mandeb strait. Over 3 million barrels per day of crude and refined products flow through this narrow passage to Europe and North America.
Analysts say a major disruption along this route or the Suez Canal could send oil prices soaring, depending on the duration. So far Yemen’s rebel attacks have had minimal impact, but the risk remains elevated.
“The conflict shows no signs of abating despite recent overtures, so the market is rightly jittery,” said OANDA senior market analyst Edward Moya. “Oil prices could spike on any material attacks that lead to supply disruptions.”
Forecasts See More Downside Than Upside
With conflicting forces in play, most analysts expect limited near-term upside for oil prices. Demand uncertainty poses the biggest headwind, damping the bullish impact of global supply threats.
“We see downside risks from here, with Brent expected to average $76 per barrel in 2023,” said UBS commodities analyst Giovanni Staunovo. “China’s recovery is key, but Europe’s economy also looks very vulnerable right now.”
If weak economic data persists alongside a strong US dollar, production cuts from OPEC+ might not be enough to buoy prices substantially. As a result, crude benchmarks could drift back toward $70 per barrel until the demand outlook improves.
Economic and Geopolitical Wildcards
Major forecast risk exists on both the economic and geopolitical fronts. Another escalation of conflict in the Middle East could easily overwhelm bearish demand factors. And if China’s reopening proceeds smoothly or Europe avoids recession, oil markets would tighten further.
For now, ida expect rangebound prices near current levels. But any number of wildcard events could change the landscape rapidly. Traders expect volatility to remain elevated as conflicting fundamental forces battle for dominance.
So while crude prices ticked lower this week, no clear trend has emerged yet in 2023. Last year’s extreme price swings highlight just how quickly sentiment can shift based on incoming news. Whether bulls or bears dominate next remains anyone’s guess.
Here is a table summarizing some of the key crude oil inventory data from the EIA and API:
|Surprise vs Estimate
|-1.8 million barrels
|+1.33 million barrels
|Build instead of draw
|+6.43 million barrels
|+8.03 million barrels
|Much larger build
This table shows how last week’s API estimated inventory changes differed considerably from EIA expectations in some cases. While the API numbers often vary from EIA stats, this week’s mismatches contributed to crude oil’s decline by sparking demand worries.
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