Brent crude oil erodes long-term bullish trend as demand concerns weigh

Both the Brent and WTI crude contracts have fallen sharply this week. Geopolitical tensions in Ukraine have eased slightly, allowing investors to refocus on the actual demand and supply factors that determine the price of oil.

The global oil market remains amply supplied with production in Iraq, for example, increasing massively over the past couple of months. The recent increases in US oil inventories suggest production there continues to rise too. Meanwhile concerns about demand have come back to the forefront. This has been fuelled by some lacklustre manufacturing PMI numbers we saw out of China, Europe and the US on Tuesday. What’s more, we had some weaker building approvals data from Australia overnight while in Europe, UK’s construction PMI disappointed expectation and the final estimate for the eurozone fourth quarter GDP was unexpectedly revised lower to 0.2% from 0.3% previously.

The demand for oil is likely to fall further as the weather improves in the US where distillate stocks, which includes heating oil, had been depleted throughout the first quarter. According to the American Petroleum Institute (API), distillate inventories decreased once again last week, albeit by only 170 thousand barrels. The API said there was again another decrease in supplies at the Cushing delivery point, this time by 1.5 million barrels, while the overall US inventories unexpectedly fell by 5.8 million. All of these numbers suggests demand had remained stronger than expected last week for US oil. However the API data is not always reliable so it will be interesting to see if these figures will be reflected in the official data from the US Department of Energy this afternoon.

Technical outlook

As a result of the sell-off, the technical outlook has turned bearish for the US oil contract – and now for Brent, too.

The WTI contract has been coming under intense pressure after it ran into strong resistance at the 61.8% Fibonacci retracement level of the last downswing at $102.20 – a level which was highlighted in our Friday’s oil report. As a result, it has broken several support levels including both the 50 and 200 day moving averages of $99.95 and $100.50, respectively. WTI is currently testing a bullish trend around the $99.00 handle. A potential break below here today, or in one of the next few days, would be another bearish development. The Relative Strength Index (RSI) has already broken its own corresponding trend line and price could now follow suit.

Meanwhile Brent has eroded a long-term bullish trend line and has taken out key support at $105.40/50. The technical outlook for the London-based contract is therefore also looking extremely bearish. The next potential support level is around $103.00. As can be seen on the weekly chart, below, this level was the low achieved in November. The selling could potentially go far beyond that, however. I wouldn’t be surprised if $100 or $96.75, even, is revisited at some point soon.