Crude stocks rise for 15 consecutive weeks

Crude oil was trading mixed first thing this morning with Brent being a touch higher and WTI trading almost unchanged after starting the day in the negative territory. Yesterday, oil prices fell sharply to mark the first down day in seven for WTI. This came on the back of a renewed sharp increase in US crude stocks to the tune of 5.5 million barrels, as reported by the American Petroleum Institute (API) last night. Brent’s slight gains today were in part due to the continued supply-side risks stemming from the Middle East after Saudi Arabia resumed bombing Houthi rebels in Yemen, despite announcing yesterday that it had ended its military campaign against them.

In the afternoon, WTI staged a relief rally and momentarily turned positive. This was in response to the official supply data from the Energy Information Administration, which actually showed a sharp build of 5.3 million barrels in the week to April 17. Although this was the fifteenth consecutive weekly increase and the build was also considerably higher than 2.7 million expected, it was still lower than 5.5 million reported by the API last night. What’s more, there was a 2.1 million barrel decrease in gasoline inventories, suggesting firmer demand for oil ahead of the US driving season. In other words, traders were relieved that the increase was not as bad as had been suggested by the API data and so they bought oil. That being said, it is becoming increasingly difficult for oil speculators to justify remaining long in the face of record rises in stockpile levels. With net long positions in both contracts being unreasonably so high, the probability of a sharp downward move is now extremely high in our view.

However, the technical outlook for US oil appears to be a lot more constructive now after the $54 resistance level was taken out last week. At the start of this week, WTI has oscillated around the 127.2% Fibonacci extension level of the last significant downswing, at $57.50. Evidently, speculators are merely taking profit after the recent upsurge; there are no signs of renewed selling pressure just yet. That could change however if oil fails to extend its rally from here and goes on to break the bullish trend. An eventual break below the prior resistance at $54 would confirm the potential change in the trend. But until and unless that happens, we remain neutral to moderately bullish on US oil in the short-term.

Brent (see figure 2) meanwhile has broken back below the pivotal $63.00 handle once again, thereby invalidating the bullish breakout that occurred above this level just last week. As such, the London-based oil contract may now go on to drop all the way back to the next key level of support at $59.70 before making its next move, although it may also find some support at the 38.2% Fibonacci level at $60.20. But if Brent manages to climb back above $63 on a closing basis today then the bullish trend may resume as we progress towards the second half of the week. In short, it is trading at a key technical juncture as we go to press.