Oil prices decline after surprise US stockpile build

Oil prices declined on Wednesday due to a surprise increase in US crude stockpiles, raising concerns about demand in the largest oil market. The EIA report highlighted investor concerns of slowing demand growth, with US crude inventories rising by 1.3 million barrels in the week ended January 5 to 432.4 million barrels, compared with analysts’ expectations in a Reuters poll for a 700,000 barrel drop. Gasoline stocks rose by 8 million barrels and distillate stocks jumped by 6.5 million barrels. At the time of writing, WTI crude is trading at $71.26 per barrel, down by -1.33% and Brent crude is trading at $76.34, down by -1.18%

Investors are caught between ongoing conflicts, soft global economic growth, and potential Federal Reserve interest rate cuts starting in March, which could spur economic activity. Europe’s weak economic outlook also added to oil demand concerns. The Eurozone may have been in recession last quarter and prospects remain weak, according to European Central Bank Vice President Luis de Guindos.

Geopolitical factors also contribute to the current oil price story, with more attacks from the Houthis in the Red Sea overnight, impacting shipping. Security concerns in the region boost US oil appeal, as traders seek safer and more cost-effective sources. The CPI print is looming, and there was an advance of about 2% on oil to $77 a barrel on Tuesday.

The Permian Basin oil production is expected to grow at a slower rate in 2024 compared to 2023, influenced by consistent oil prices and cautious production strategies among shale producers. Security issues in the Bab el-Mandeb Strait have led to increased demand for US oil, especially from European markets. US shale producers may adjust their production plans based on market demands and oil prices, demonstrating the industry’s adaptability.

The outlook for the Permian may be somewhat surprising after the strong 2023 that the shale oil industry saw. However, growth was never going to be a linear, upward curve, especially when prices are stubbornly fixed in place and traders continue to pile into short positions. A survey from Jefferies suggested that most independent shale producers were planning to increase their output only modestly this year, with the same percentage planning to either maintain the number of rigs they deploy this year or reduce it.