Crude turns higher as stocks of oil products decrease sharply

WTI crude oil was trading lower prior to the official crude inventories data this afternoon, hovering around $49 a barrel. In contrast, Brent was trading in the black around $59. The gap between the two oil contracts had therefore widened to a good $10. The price divergence in these two oil contracts in part reflects the disappointment that the US oil output has continued to grow unabatedly despite the much weaker prices recently. On top of this, there seems to be some disquiet among the OPEC as so far Saudi’s idea of defending the cartel’s market share has not exactly worked compared to how they had probably envisaged. For example, Nigeria’s oil minister, Diezani Alison-Madueke, who is also the current president of the OPEC, has said that further price volatility would make it “highly likely that I will have to call an extraordinary meeting of OPEC in the next six weeks or so.” This has increased speculation that the cartel may after all cut back its production quota and thus concede some market share to shale producers. And although the recent sharp falls in rig counts point to some future production cuts in the US and elsewhere, nothing has been done about the supply glut in the short-term and this continues to exert strong downward pressure on WTI prices.

The US oil glut has continued to grow in recent weeks, causing inventories to swell to record levels. Indeed, the latest data from the Energy Information Administration (EIA) has shown another large increase in oil stocks to the tune of 8.4 million barrels last week. Although the build was more than double the amount expected, it was mostly priced in after data from the American Petroleum Institute (API) last night had already shown an even larger increase. Hence, WTI was already trading lower prior to the EIA data release this afternoon while Brent was higher. In fact once the EIA numbers hit the wires, WTI initially dropped by a good 50 cents to a low of about $48.50 before staging a short-covering rally as traders who had sold on the rumour bought the fact. The rally off the lows was fuelled further by news that both gasoline and distillate stocks had decreased sharply last week, by a good 3.1 and 2.7 million barrels respectively. The initial negative reaction suggests some speculators were nonetheless disappointed as production, for the umpteenth time last week, remained largely unaffected by the much lower oil prices. And had it not been for the sharp decrease in inventories of oil products, WTI would have probably remained lower on the session.

But despite the bounce, the technical outlook on WTI still remains bearish – until proven otherwise. As can be seen on the 1-hour chart, the US oil contract created a triple top reversal pattern early last week at $54.00 and ever since then it has been trading lower inside a short-term bearish channel. Though it has found decent support around $48.75, the short-term bias would only turn bullish upon a break above the resistance trend of the channel which comes in around $50.50. In contrast, Brent is managing to hold its own above the resistance-turned-support level of $58.50 for now. So, there is a chance for Brent to push higher from here, though it may face strong resistance at $60, $61 and $63. But if and when Brent posts a daily close below $58.50 then we could see a strong move to the downside.