WTI remains under pressure as crude stockpiles increase sharply again

Crude oil prices fell sharply in response to the latest stockpiles data, released at 14:30 GMT, before bouncing back to turn moderately higher on the session. According to the Energy Information Administration (EIA), oil inventories in the US rose sharply again last week, this time by 7.1 million barrels. Although this was somewhat smaller than the previous week’s 8.9 million-barrel build, it was still much larger than 2.8 million expected and even more compared to the American Petroleum Institute’s (API) estimate – 1.2 million-increase – that was released late yesterday. Distillate stocks, which include heating oil, also increased, by 1.05 million barrels, while gasoline inventories – not that they matter much at this time of the year – dropped by 1.3 million barrels. Meanwhile the refinery utilization rate dropped to 86.7% from 88.1% the prior week, missing expectations of 87.9%. Overall this is clearly another bearish oil report as it suggests the supply of crude is excessive in relation to demand from refineries, which in itself continues to remain weak.

Although the fundamental outlook for oil continues to point to lower prices, traders may find it uncomfortable selling at these already-depressed levels, especially as the supply-side risks remain elevated due to the on-going situation in the Middle East. If oil prices refuse to break further lower in the coming days then that would suggest a near term bottom may have already been formed. This however does not necessarily mean oil prices will rally sharply; they could simply consolidate near the lows. For prices to stage a meaningful rally, the OPEC will need to address the overproduction of crude in many member states. The global demand picture is unlikely to improve materially either, even though implied demand from China, the world's second-largest consumer, has already jumped sharply in September thanks to the weaker oil prices.

WTI has already created a false breakout pattern (bullish) below the psychological $80 mark, which we covered in our last week’s report HERE. So far, this level has not been tested again as prices have consolidated inside a pennant formation, which can be seen on the updated 1-hour chart, in figure 1, below. A potential break below the lower trend of the pattern, at $81.60, could lead to a drop to $80.00 in the near term, while above the upper trend (i.e. above $83.15) could pave the way for $84 or even $85, before it makes its next move. Below $80, the next potential support level is at $77.50, followed by $75 and then $70. On the upside, the long term key resistance area is around $90-91, where prior lows meet the underside of a long-term broken trend line and the 38.2% Fibonacci retracement level of the downswing from the June peak. See the weekly chart, in figure 2, for details.