Crude oil extend gains on brighter demand prospects

As we had predicted on Monday, crude oil prices have rebounded strongly in the middle part of this week. At 107.75 and 102.30 dollars a barrel, Brent and WTI prices this morning were around $3.30 better off compared to their low points on Tuesday.

Given that there have been no fresh disruptions to oil supply this week, Brent’s price jump is partly due to the fact the front month future was trading at a considerable discount to the back month contract. As the rollover date to the September contract approached (the transfer occurred yesterday), spot prices thus recovered sharply. The London-based oil contract has been boosted further by renewed worries over the possibility of retaliatory action from Russia after it was slapped with fresh sanctions by the US over its involvement in the crisis in Ukraine.

In the US, oil prices have found support from an unexpectedly sharp reduction in crude inventories. As the US Department of Energy reported on Wednesday, crude stocks fell by 7.5 million barrels last week, undoubtedly because oil processing from refineries hit a record level as they operated at 93.8% of their operable capacity. In other words, demand for US oil was stronger than expected last week as it has been the case since the start of the month. Meanwhile optimism is once again on the rise about construction activity in the US. On Wednesday, the National Association of Home Builders’ (NAHB) Housing Market Index climbed above the expansion threshold of 50 for the first time since January. It printed 53 for July compared to 49 in June and expected reading of 51. Today we will have some more housing market data, namely building permits and housing starts. If these also show positive signs then oil traders may start to take notice and drive prices further higher in anticipation of stronger crude demand from the construction sector. Having said that, supply of US oil remains close to record levels, so the possibility of seeing sustainable high crude prices are still slim.

Following the recent price recovery, WTI has climbed above its 200-day average and this morning took out another resistance at $101.50 before climbing to a high so for of $102.30. This $102.30 level incidentally ties in with the 38.2% Fibonacci retracement level of the recent downswing. So, while WTI remains below this shallow retracement level, it would suggest that we are still in an overall downward market. Indeed, a potential break back below the $101.50 support level is likely to see the return of the sellers. But a closing break above $102.30, or preferably $103.00, would point to renewed upward momentum.

For Brent, the short-term resistance levels to watch are at $107.75/95 and $108.70/95. The $107.75/95 area was previously support and resistance, while the $108.70/95 region corresponds with the 200-day moving average and 38.2% Fibonacci retracement level of the recent bear trend. Support comes in at $106.80, $106.00, $105.00 and $104.50.