Crude oil: decision time for Brent

Crude oil prices are easing back a touch after yesterday’s sharp rally. Brent and WTI surged higher yesterday after the latest data from the Energy Information Administration showed US stockpiles grew a lot less strongly in the week to April 10 than they had been since the start of the year. The build of just 1.3 million barrels was below the expected reading of 3.5 million. On top of this, gasoline inventories decreased by a good 2.1 million barrels. Whether or not the market overreacted to the news remains to be seen for after all the small build was helped primarily by a 1.1 million decrease in imports from the previous week. But evidently, speculators are probably thinking that the worst days are behind us and may therefore expect to see an imminent drop in US oil output after months of falling rig counts. But if sanctions over Iranian oil are lifted – as a result of the recent nuclear agreement – then we would be back to square one as Tehran would undoubtedly ramp up output and other OPEC members will likely maintain their existing production levels to defend their market share. In other words, the oil market surplus may remain intact and thus continue to exert pressure on prices.

Meanwhile the longer term technical outlook for oil does not look as bearish now, although the probability for a short term downward move has increased following the recent rally. The buyers may decide to take profit on their long positions here while the sellers may see these levels as decent levels to re-establish short positions. Indeed, Brent oil is hovering around $62.50/63.00, an area which has acted as strong resistance to prices in the past. A potential closing break above this area is likely to encourage fresh buying interest. But while below here, the risks are that prices may pull back once again, at least towards the short-term support at $59.70. But WTI has already taken out its corresponding resistance area at around $54. So will Brent now follow suit?

That said, WTI has now reached a Fibonacci exhaustion area around $56 (there are a couple of 161.8% extension levels converging at $55.80 and $56.55) so it may pullback towards the $54 handle before deciding on its next move. The near-term trend for the WTI contract would remain bullish while it holds above the trend line or the broken resistance at $54.00. The next potential bullish targets could be at $57.50 (127.2% extension of XA swing), $58.50 (old resistance) or even $60.00 (a psychological level).