Crude oil stages short-covering bounce despite bearish oil report

The price of WTI crude oil this morning fell below the key $80.00 for the first time since June 2012. However it has bounced back sharply from there and not even a bearish-looking oil report could halt the comeback. The Energy Information Administration (EIA) data showed crude stockpiles in the US climbed by a much larger than expected 8.9 million barrels last week, while gasoline inventories decreased by a good 4 million barrels and distillate stocks also fell slightly. Overall, I don’t think the decreases in gasoline stocks were large enough to outweigh the impact of the overall crude stockpile build. The rally therefore is mainly because of technical reasons (see below) and also due to a slightly weaker dollar after St. Louis Federal Reserve Bank President James Bullard said the Fed should consider delaying the end of its QE stimulus programme in a bid to halt the drop in inflation expectations. That was enough to cause stocks to swing widely into the positive territory and the dollar to give back its entire gains from earlier in the day. Oil found additional buoyancy from the release of some stronger than expected US economic data, which helped to boost demand expectations a little. Nevertheless, demand growth for oil is still likely to be weaker than had been expected which is why the International Energy Agency (IEA) revised down its estimates for both 2014 and 2015. In addition, the plentiful global supply of oil should help to keep a lid on prices.

Nevertheless, WTI looks like it may stage a recovery of some sort from these oversold levels. As mentioned, it momentarily dipped below the psychological $80 mark this morning. But the lack of further supply below this key level caused prices to bounce back as the shorts started to cover some of their positions. There’s probably more stop loss orders above the previous high at $82.40 and if these get triggered then we may see a more profound rally towards $83.60 and possibly even $85.00. On the other hand, a closing break below $80 could pave the way for a move down to $77.50 and possibly lower over the coming weeks.

Figure 1:

Source: FOREX.com. Please note this product is not available to US clients.

Figure 2:

Source: FOREX.com. Please note this product is not available to US clients.