Crude oil prices are slightly higher during Asian trading on Wednesday, despite falling overnight. This is due to traders pricing in higher risks of a global recession, which puts oil demand prospects into question. Global growth expectations have been weakening due to persistently high inflation and central bank tightening. This news, combined with the mass testing in China, has brought a familiar headwind back into the market.
According to the EIA, US crude inventories dropped by 1.7 million barrels last week, but the decrease is expected to be smaller than that. However, in recent weeks, US crude inventories have fallen by nearly 30 million barrels. This could be a sign of stabilizing crude demand. Also, recent data showed that pending home sales fell by 7.7 percent in January. Meanwhile, Ford Motor Co. reported a 48 percent drop in sales in February.
Another factor that may help stabilize oil prices is the drop in OPEC production. In the last few months, OPEC has cut production by 4.2 million barrels a day. However, if these cuts do not materialize, prices may fall further. In the meantime, oil importing countries would benefit from a lower price. Analysts say that lifting the restrictions on OPEC production may add a million barrels a day to world crude supplies.
The EIA’s Short Term Energy Outlook (STEO) released a forecast for US crude production through the end of 2016. The data also showed that US crude oil production would rise past its historical highs. Meanwhile, retail gasoline prices are projected to decline, albeit slowly. While retail gasoline prices are expected to fall by the end of the year, a 5% increase is projected for electricity bills this summer.
The EIA report was a mixed bag for US and Canadian rig counts. ULSD and gas closed up 0.256 points to 2.2069 and 0.0513 points to 2.067 respectively, canceling out the losses from Wednesday. The EIA report is due at 7 pm ET and could trigger a negative reaction in WTI. If the EIA report shows a larger draw, prices may fall again.
The EIA inventory data also showed that crude oil stocks in the U.S. rose more than expected. However, the stockpiles of fuel have increased. This has been a negative sign for the oil market. If it continues to rise, prices may reach $50. However, a large-scale cut would be risky for the global economy, as OPEC is reluctant to further burden an already fragile global economy.
The EIA report also showed that Japan is going to give a subsidy to refiners to offset the effect of high oil prices on their national oil products. The government will give funding to refineries after retail prices exceed a certain threshold. This is a significant subsidy for the oil industry, and it is expected to prevent further increases in prices. This is a welcome move by Japan and the world as a whole, but if the Japanese aren’t careful, their economy will suffer.