WTI tumbles as excessive oversupply causes oil stocks to surge

Crude oil prices have turned mixed after initially rallying on the back of recent comments from various oil ministers and also the International Energy Administration’s (IEA) chief economist. There seems to be a growing consensus that the current low oil prices is likely to be temporary as many shale oil producers will probably be forced to cut back production soon. This is likely to happen in the second half of the year, assuming oil prices will continue to remain low in the intervening time. But nothing has been done about the excessive oversupply of the stuff in the meantime, which continues to weigh heavily on prices. According to the US Department of Energy’s Energy Information Administration (EIA), crude stocks increased in excessive of 10 million barrels last week alone. At a good 398 million barrels, inventories are now at the “highest level for this time of year in at least the last 80 years,” so says the EIA. The latest build in stocks was nearly double the amount compared to the previous week’s 5.4m barrels and four times above expectations (2.5m). It was also significantly more than the American Petroleum Institute’s (API) estimate from last night (5.7m). Though distillate stocks actually decreased by 3.3 million barrels last week, this was not a large-enough drawdown for speculators to take notice. As you would have thought, WTI oil prices therefore turned sharply lower on the back of the data as investors were once again forced to remember that the excessive supply is not going anywhere in the short term. Although Brent is still a touch higher, the announcement of QE from the ECB is unlikely to offer much support. It is hoped that QE will help drive economic recovery in the Eurozone, which in turn may lead to higher demand for crude over the long term. But in the short term, ECB’s QE is likely to make the dollar more expensive vis-à-vis the EUR/USD currency pair. As crude oil is traded in US dollars, the stronger greenback is likely to weigh further on its price.

Following today’s earlier rally and the subsequent sell-off, WTI was once again unable to hold its own above the $49-$50 resistance area. Therefore, it continues to remain in a strong downward trend and potentially still on course for further losses. One particularly bearish outcome would be if it breaks through $45.00 and holds below it on a daily closing basis in one of the upcoming sessions. In that case, the bears may then target the Fibonacci extension levels of the recent up move: the 127.2% comes in at $42.25 while the 161.8% is at just below the psychological $40.00 handle. That said, a potential rally and close above the aforementioned $49/50 range would mark an end to the bearish trend in the short-term. Meanwhile, Brent’s doji candle that was created on the weekly chart last week suggests traders were indecisive when it was trading around the key $50 handle. As there has been no further follow-through in buying so far this week, I am forced to conclude that further losses appear more likely than gains for tomorrow and the week ahead. Only a decisive break above last week’s high of $52.40 would invalidate this view.

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

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