Crude oil rallies as inventories increase less than expected

Crude oil prices have risen for a second straight day. As well as a weaker dollar and technical buying, oil prices have found some support from the better than expected stockpiles data that was released this afternoon. According to the US Department of Energy, oil inventories climbed by just shy of 2.1 million barrels in the week ending October 24. This increase was significantly lower than the prior week’s 7.1 million build and also below expectations of 3.3 million. What’s more, gasoline and distillate inventories actually fell by a good 1.2 and 5.3 million barrels, respectively. However, over the past four weeks, oil stocks have increased by around 23 million barrels. So, unless we see a period of sharp destocking, prices may struggle to sustain their gains because the global supply of the stuff remains excessive and demand growth is expected to be weak. Meanwhile the dollar could resume its upward trajectory if the Fed disappoints the markets tonight by delivering a less-dovish-than-expected policy statement. If so, the buck-denominated commodities could come under renewed pressure.

Technical outlook

I have been banging on about the importance of the psychological $80 mark on WTI for a number of weeks now. The fact that the sellers have been unable to commit themselves below that level suggests prices may have formed a near-term bottom. As can be seen on the 4-hour chart (figure 1), WTI has created a couple of false breaks below the $80 level which is bullish. On top of this, prices have broken above a short-term bearish trend line, paving the way for a recovery which is already underway. What’s more, the RSI has been in a clear state of divergence with price, confirming that the bearish momentum is fading. So, in the short-term, a move towards the next resistance at $84 or even $86 look probable. Meanwhile in addition to psychological support at $80, there is also a long-term Bullish Butterfly formation around $81 (see the weekly chart in figure 2). This further increases the chance for a bounce from these levels. Typically, this Fibonacci-based pattern leads to at least a 38.2% retracement of its CD leg. This translates to a potential rally to around $90. The chart of Brent (figure 3) is likewise looking a bit more constructive. The London-based oil contract has broken above resistance at $87, which has paved the way for a move towards the resistance trend of its downward channel around $90. On the way to $90 lies another potential hurdle: $88, which is being tested at the time of this writing.