Crude oil fundamentals point to lower prices

The price of crude remains supported almost entirely by concerns over geopolitical tensions in Ukraine and Libya. After all, one would have expected oil prices to be much lower than they actually are given the excessive supply of US oil and weaker demand. Nine months of blockages at oilfields and export terminals by armed rebels has seen Libya’s crude output reduce to about 220,000 barrels per day from 1.4 million bpd before the troubles began last summer. Admittedly, the situation there has improved somewhat in recent weeks after the government reached an agreement with the rebels to re-open some terminals. However, the progress has so far been painfully slow, limiting output to increase only marginally. Likewise, there was some hope that the separatists in Ukraine would back away after last week’s Geneva accord. But this hasn’t been the case and the situation in the east of the country remains very much out of control. Were it not for these reasons, oil prices could well be a lot lower. For one, the production of oil in the US is at its highest level since 1988. For another, oil inventories have now reached a record high of 397.7 million barrels, suggesting weaker demand. According to the Energy Information Administration, US oil stocks climbed by an additional 3.5 million barrels last week which was higher than an expected increase of 2.6 million. Gasoline inventories fell by only 0.3 million barrels versus 1.7 million expected while distillate stocks rose 0.6 million vs. a decrease of 0.5 million anticipated. Meanwhile oil stocks at Cushing, where WTI is priced, fell once again, this time by 0.79 million barrels to reach their lowest in almost five years. However this merely represents the excessive oil being shifted from one region to another, namely the US Gulf coast. Indeed, oil stocks there hit a record high of 207.2 million barrels last week.

Following the oil inventories data yesterday, WTI initially fell before bouncing off is lows as it found support near its 50-day moving average at $101.30. A potential break below here could expose a bullish trend and 200-day average at $100.55 for a test. Meanwhile resistance could come in around $102.20 or $103.00, levels which were formerly support. With the sales of new US homes in March disappointing market expectations yesterday, the focus will be on today’s unemployment claims and durable goods orders. The latter is expected to have risen 2.1% last month; excluding transportation items, orders for long lasting manufactured goods are predicted to have increased by 0.6%. Unemployment claims are expected to have increased by 5 thousand applications last week to 309 thousand from 304 thousand the week before. These second-tier data releases are likely to have limited impact on oil prices, however.