Crude oil sharply lower ahead of inventories data

Both the major crude oil contracts are lower this Wednesday afternoon with Brent trading just below $113.50 and WTI around $105.60 a barrel. Brent’s weakness is somewhat surprising as worries still remain that the violence in Iraq may disrupt oil supplies, with the country’s biggest refinery – the Baiji complex, which has an output capacity of 300,000 barrels per day – still under threat of being captured by the rebels. However, most of Iraq’s oil is exported from the South and the situation there is normal. In other words, there hasn’t been any actual or meaningful disruption of oil supplies in Iraq yet, which may be why the price of Brent crude has struggled to hold above the $115-a-barrel mark in recent trade. It is currently heading towards $113.00, a level which was previously resistance and so could turn into support now.

US oil has also relinquished nearly all of the gains made yesterday when a report by the Wall Street Journal said the US has given permission for two companies to sell unrefined crude oil overseas. The WSJ said the move could ease the trade ban that has been in place for nearly four decades. WTI rose on this piece of news because domestic oil producers could get a higher price from foreign buyers than from refineries in the US, where competition is strong due the excessive and growing crude supply. However, as mentioned, WTI has fallen back today along with the Brent contract. This could be because of concerns over demand following the American Petroleum Institute’s (API) crude stockpiles data on Tuesday which showed an unexpected build of 4 million barrels last week. The US Department of Energy will publish the official inventories data at 15:30 BST (10:30 EDT), which is expected to show a 1.2 million drawdown. But after the API’s numbers, traders fear the official stockpiles data will also show a sharp build.

On the technical front, the WTI contract continues to trade sideways between $105.00/20 and $107.35/70 as we had pointed out previously. At the time of this writing, WTI is trading a lot closer to the lower end of this range and so another test of the $105.00/20 area could be on the cards. If the oil inventories data shows a surprisingly large build then WTI may go on to even break below this key technical level. However until/unless it does, the trend for US oil remains bullish. Meanwhile a potential break above the $107.35/70 resistance area at some point in the near future could pave the way for $108.80 and then $110.00. These levels correspond with some Fibonacci extension levels as can be seen on the daily chart, below: