US crude oil outlook

WTI crude oil’s response in the aftermath of the latest inventories data from the US Department of Energy’s Energy Information Administration (EIA) was somewhat bullish. The EIA confirmed the 1.8-million-barrel drawdown that was reported by the American Petroleum Institute (API) on Tuesday evening. The sharper drop suggests the demand for oil was stronger than expected at the end of April, which was consistent with some of the other US data we have seen of late, most notably the nonfarm payrolls numbers. However, gasoline stocks unexpectedly increased by 1.6 million barrels and this took the gloss off an otherwise bullish oil report. As we head into the US driving season, gasoline stocks in particular will be monitored closely by market participants.

For the price of US oil to stage a more meaningful rally, I do need to see further drawdowns in stockpiles over the coming weeks; otherwise the move could well be faded due, above all, to the still-rising supply. Meanwhile I have been banging on about the falling stockpile levels at Cushing's giant storage hub for weeks now and why I feel it does not necessarily lead to higher oil prices. According to the EIA, inventories there fell again last week to reach their lowest level since 2008. Although stocks at the Gulf Coast also fell for once, this was at least partly due to a drop in imports. Overall imports of oil in the US declined by almost 600,000 barrels per day (bpd), but more importantly they hit their lowest levels since September 2008 on the Gulf Coast. This clearly suggests that the supply of US oil is ample and that the flow of crude to Gulf refineries from Cushing may have to slow down.

As always, it is vital for oil traders to keep a close eye on the crude inventories reports from the API, released Tuesday evenings, and the EIA, on Wednesday mornings US time. For technical traders, the range-bound conditions mean approach with caution. Since the beginning of February, WTI has been moving in a relatively tight range between $97.50 and $105.00. As things stand, the US oil contract is set to post its first weekly gain in three. Although it is not exposed to the on-going crisis in the same way as Brent is, there’s potential for WTI to climb a little bit higher again next week should the situation there deteriorates further. But I remain doubtful that the WTI’s rally will last long. Nevertheless a potential break above resistance $102.20 could see the price of oil climb towards the upper end of the aforementioned range. On the downside, a potential break below support around $98.85 could expose the $97.50 level for a retest.