WTI Recovers the 10% Loss

Crude prices in the US have had a rocky start to the year, falling nearly 10%, but WTI has recovered all losses now after hitting a high of $82.66/bbl earlier this week. Many factors have pushed the price down mid-week, but a primary one for its rise.

Short-term events impacted price

There are three main factors behind the sudden drop in the price of WTI in the middle of the week. The first was the release of retail sales data, which substantially underperformed expectations. It came along with a series of other data, including negative PPI and a worse-than-anticipated drop in industrial production. All this supported a narrative that the US economy was sputtering, which could further crimp demand.

On top of that, both API and EIA reported a surprise build in inventories (although EIA's move has been fully discounted), both crude and gasoline. This was again attributed to the lingering effects of the cold weather shut-in of refineries in December. The third factor was the start of a one-day warning strike by workers at refineries in France, which raised further uncertainty in the market. Last year, refinery strikes in France contributed to rising oil prices.

China risk positive, US and EU risk negative

The drop in crude prices erased much of the gains from China's Q4 GDP figures, which handily beat expectations. China's economic growth supported demand after increasing its oil buying quotas. There remains substantial concern about the global economy in the short term. Europe has enjoyed a period of unseasonably warm weather that has reduced demand for fuel, but forecasts are for a cold snap later in the week.

The latest outlook from the IEA suggests that global consumption will reach a record daily peak this year, contingent on the Chinese economy regaining momentum. But the same report indicates that the world faces a large surplus at the start of the year. The consumer market is seen as weaker than expected, as reflected in the retail sales numbers. The report also pointed out that global oil inventories have continued to grow, even as OECD countries released reserves.

WTI outside upper wedge trendline

Bulls met stiff resistance at the channel top near $82/bbl in their first attempt to break outside the descending wedge pattern originating at $130/bbl. But, there is short-term support at $80/bbl, suggesting the resistance flipped to support now. Breaching the upper channel could increase prices to $88/bbl and even $94/bbl. Otherwise, a spiral towards $62/bbl could be in store if crude prices slide below $76/bbl and the stronghold of $70/bbl.

Key takeaways

The price of WTI crude oil has recovered this week after falling nearly 10% at the start of the year. This week's drop was attributed to disappointing retail sales data, a build in inventories, and refinery strikes in France. However, China's Q4 GDP figures beat expectations, and the IEA predicts global oil consumption will reach a record daily peak this year. But there is still significant concern about the global economy in the short term, mainly due to weak European demand unless the weather gets colder.