Oil up 3% despite big U.S. crude build as bulls bet on weaker CPI, Goldman call

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By Barani Krishnan

AiVIF.com -- Oil prices defied a humongous U.S. crude build to rally 3% Wednesday as bulls in the market bet instead on weakening rate hikes from sagging inflation and a Goldman Sachs call for a barrel to return to above $100 by the third quarter of this year.

New York-traded West Texas Intermediate, or WTI, crude was up $2.18, or 2.9%, to $77.30 per barrel by 13:20 ET (18:20 GMT) after a session high at $77.81.  

London-traded Brent crude was up $2.33, or 2.9%, to $82.43, after an intraday high at $82.91.

Both WTI and Brent fell by more than 8% last week in one of their worst openings for a year as the market tanked on concerns of a global recession and weak potential demand from top oil importer China despite Beijing's determination to move on from its tough COVID-zero policy.  

In Wednesday's trade, crude rallied as traders across markets bet on a sizable drop in inflation numbers in the December U.S. Consumer Price Index, or CPI, report due on Thursday. Economists tracked by AiVIF.com expect year-on-year CPI growth to have contracted to 6.5% in December from 7.1% in November. Just in June, inflation was roaring at a four-decade high when annual CPI growth came in at 9.1%. 

The December CPI reading will determine whether the Federal Reserve will continue to lower rate hikes at its February 1 policy meeting. The Fed increased rates by a blockbuster 75 basis points four times between June and November, before resorting to a 50-basis point hike in December. For February, the consensus is for a 25-basis point increase.

Bets for lower inflation and rate hikes aside, the oil trade was also boosted Wednesday by comments from Goldman Sachs’ commodities chief Jeff Currie — one of Wall Street's top cheerleaders for oil — who told a Bloomberg TV interview that a barrel could return to $100 before the year-end.

“What is the best reopening play? It is oil,” Currie said. “What is idled? Planes, trains and automobiles. You turn them all back on, that’s going to be a big pop in oil demand.”

A barrel of Brent oil could reach $110 by the third quarter if China and other Asian economies fully reopen from coronavirus restrictions, Currie added. 

Just a day ago, the U.S. government’s Energy Information Administration, or EIA, said it expected the global price of oil, benchmarked to Brent, to average $83 a barrel this year, down 18% from the 2022 level of just over $100,

Separately on Wednesday, the EIA, said U.S. crude stockpiles jumped by almost 19 million barrels last week, or 11 times more from the previous week — bucking market expectations for an inventory drop at a time when demand is typically higher as refiners use crude to build product supply, particularly in heating oil, for the winter.

Analysts polled by U.S. media had expected a crude draw of around 2.2M barrels instead for last week.

“I think refiners just had a slowdown in product putouts last week because the weather hasn’t been cold enough, to necessitate the creation of, say, more heating oil,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. 

The start of the 2022/23 winter season has been marked by abnormally high temperatures, with the daily average over past week at around 45 degrees Fahrenheit (7 Celcius) as opposed to the 35-25 degree Fahrenheit range (around 2 to -2 Celcius) common for this time of year.

Inventories of distillates, which are refined into heating diesel, diesel for trucks, buses, trains and ships and fuel for jets, fell by 1.069M barrels last week, the EIA said, more than the forecast decline of 472,000 barrels. In the previous week, distillate stockpiles fell by 1.427M barrels.

On the gasoline front, inventories rose by 4.114M barrels last week, versus expectations for a build of just under 2M barrels. In the previous week, gasoline balances declined by 346,000 barrels. Gasoline is America’s premier automobile fuel.

Crude inventories in the U.S. Strategic Petroleum Reserve, or SPR, meanwhile, dropped by just 800,000 barrels last week, the EIA said, as the Biden administration wound down its dependence on the emergency oil stockpile that it used intensively over the past year to add to market supply and bring down pump prices of fuel.

SPR inventories stood at 371.6M barrels during the week ended January 6, versus a December 30 reading of 372.4M, the EIA said.

The latest draw sharply contrasted with previous declines of as much as 8M barrels a week from the reserve.

"This is probably the smallest SPR drawdown over the past year, pending confirmation from the EIA," said Kilduff of Again Capital. "For all intent and purpose, the administration's dependence on the emergency oil reserve is over as the drawdowns have done their job of adding to market supply and bringing down retail prices of gasoline."

The Energy Department, under the orders of President Joe Biden, has drawn more than 200M barrels from the SPR since November 2021. The action sent the reserve's inventories to a near 40-year low. At their current standing, the SPR's stockpiles match December 1983-levels, the EIA's historical data showed.

The crude releases from the SPR, along with other global market developments, added to international oil supplies over the past year, slashing crude prices from a high of more than $130 a barrel in early March, right after the Ukraine invasion, to current levels of around $80 a barrel or below. Pump prices of gasoline in the United States have also tumbled from a record high of $5 a gallon in mid-June to a current average of under $3.30, data from the American Automobile Association showed.

The slowdown in SPR draws came after the Biden administration said late last year that it was winding down its dependence on the reserve and was ready to add to its inventory. The administration is negotiating purchases with U.S. energy firms to refill the reserve, starting with a base offer of $70 per barrel.