Crude oil falls on Chinese concerns

Crude oil is sharply lower at the start of this week. Evidently, it is the return of Chinese economic slowdown fears which has caused this latest pullback. Although China’s crude imports in the first two months of the year rose some 11.5% compared to the same period in 2013, this was completely overshadowed by exports data which showed a big and unexpected fall of 18.1% last month. As a result, China’s trade balance showed its second largest deficit on record. Although some would argue that this miss may have been due to possible distortions in data due to the Lunar New Year holiday, combining the January and February numbers and exports were still down by 1.6% year-on-year. Preventing an even larger fall in oil prices is the on-going geopolitical tensions in Ukraine and Libya.

The US nonfarm payrolls data surprised to the upside on Friday and this is also helping to keep a floor under prices for now. Last week we also had the latest crude inventories data which showed a larger than expected increase. Distillate inventories increased unexpectedly to which suggests demand for heating may have already started to fall, and the trend may continue as the weather improves. But destocking in Cushing, Oklahoma, where the WTI contract is priced, continued once again. This may well be one factor behind potential price gains in the near-term.

The technical outlook meanwhile looks mixed for WTI. The US oil contact managed to hold its own above the 200-day moving average ($100.15) and also the $1007.70/$101.00 support range last week. But it has already formed a negative divergence whereby its move higher was not supported by a corresponding rise in the RSI, which in fact created a lower high. This suggests the rally may be stalling, although we have seen some sharp losses already. The near-term resistance levels to keep an eye on next week are $103, $104.20 and $105.20. A potential break above $105.20 would be a particularly bullish development.