Oil edges up after big 2-day loss to year’s start

By Barani Krishnan

Investing.com -- Oil prices edged higher Thursday from a massive two-day loss to the start of the year as bulls in the trade pounced on a mixed weekly inventory report from the U.S. government that showed unexpectedly high demand for diesel toward the end of 2022 that offset a build in crude stockpiles.

A temporary shutdown of a U.S. fuel pipeline also bolstered the market. Top U.S. pipeline operator Colonial Pipeline said its Line 3 had been closed for unscheduled maintenance, with a restart expected for the products line on Jan. 7.

U.S. West Texas Intermediate crude for delivery in February was up 74 cents, or 1%, to $73.58 per barrel by 12:40 ET (17:40 GMT). 

WTI, as the U.S. crude benchmark is known, dropped to a three-week low of $72.91 earlier this week. It also lost an accumulated 10% between Tuesday and Wednesday on growing fears about a global recession and China's ability to contain its coronavirus crisis. It was the biggest two-day loss in three decades for the start of a year in WTI trading.

U.K.-origin Brent crude for delivery in February was up 59 cents, or 0.8%, to $78.43 per barrel after a three-week low at $77.91. Like WTI, Brent was also down about 10% from the first two days of trading for the year.

Oil prices gained in Thursday’s trade after the U.S. Energy Information Administration, or EIA, reported a drawdown of 1.427 million barrels in distillate stockpiles for the week ended Dec. 30. Analysts tracked by Investing.com had forecast a drop of just 396,000 barrels for the Dec. 30 week. In the previous week to Dec. 23, distillate inventories fell by 282,000 barrels.

Distillates are refined into diesel for trucks, buses, trains and ships as well as fuel for jets. The surge in their usage during the final week of December suggested an acceleration in trucking activity for holiday package delivery. 

The distillates draw blotted out the crude inventory build of 1.694M barrels for the week ended Dec. 30.  

Crude stockpiles had been expected to rise by only 1.154M last week — some 47% lower than the level reported by the EIA. In the previous week to Dec. 23, crude balances rose by just 718,000 barrels.

Notwithstanding the crude build, exports of U.S. crude rose to 4.207M barrels per day last week from the previous week’s 3.465M. There was an additional outflow of 3.3M barrels from the U.S. Strategic Petroleum Reserve that left the national oil reserve with its lowest crude balance since December 1983, the EIA said.

On the gasoline stockpile front, there was a decline of 346,000 barrels versus a forecast draw of 486,000. In the previous week, gasoline balances fell by 3.105M barrels.

“It’s a mixed inventory data at the best, but it’s what oil bulls needed to get a toe back into the market, after the massive losses in the first two days of the year,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. “Also, the shutdown of the Colonial Pipeline, temporary as it may be, is providing some support to the market.”

With the weekly EIA report out of the way, the market’s attention now would be on Friday’s U.S. nonfarm payrolls report for December. The jobs report is the first top-tier release of 2023, before next week’s more important Consumer Price Index, or CPI, report. 

Economists expect nonfarm payrolls to have increased by 200,000 in December — lower than the 263,000 seen in November but higher than the under 200,000 a month experienced prior to the outbreak of the coronavirus pandemic in March 2020.

The nonfarm payrolls report is critical as the Federal Reserve faces a dilemma on whether to keep up with monetary tightening to get inflation to its preferred level or let up on aggressive rate hikes to shield the economy from a slowdown. Higher inflation and rising interest rates have hit the housing sector – and could next hit the labor market, which has shown stupendous growth for the past two years, since the world came off the worst of pandemic. On the other hand, eight nonfarm payrolls reports have exceeded economists' estimates, so another positive surprise cannot be ruled out.