Crude’s dwindling levels of open interest have left it open to sharp swings in recent months, and a failed attempt to break above its 50-day moving average this week has done little to improve the technical picture. While sanctions against Moscow over Russia’s war in Ukraine dragged its oil flows to 2022 lows late last month, that’s been of little relief to bulls so far this year. 

The impact of a pre-Christmas freeze that hobbled refinery capacity in some parts of the US should also become clearer in inventory data this week, with the industry-funded American Petroleum Institute’s figures due later. In the short-term, that has lowered crude processing capacity in North America and is also weighing on prices. 

“We’ve seen these big freeze-offs in the US and that has meant that the crude balance has actually weakened,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., said in a Bloomberg TV interview, referring to US refinery closures due to cold weather. “There’s a few more weeks of softness I would think.”

Eoin Treacy's view

The weakness in the oil sector has little to do with Chinese demand questions. Instead, the illiquidity of the futures market is an increasingly troubling issue because it increases volatility. Open interest in front-month Brent Crude contracts is back at 2015 levels and trending lower.
The pandemic surge in China is a short-term phenomenon but the recovery will be explosive as spending is unleashed. Meanwhile the market is testing the US government’s resolve to buy for the Strategic Reserve at $67-$72. West Texas Intermediate is approaching that bank now.
For now, the Energy SPDR is holding in the region of the peaks. If oil breaks down from that official purchase band, it will have a knock-on effect for the broad energy sector.

The major oil services companies, Haliburton and Schlumberger, continue to firm in the region of their respective highs.