Crude Oil Supply Glut Dampens Demand Prospects

$OIL, $USO

Crude Oil has given back a good bit of the gains made early on the week, as prices have started to fall from Wednesday afternoon as traders took profit ahead of the official supply data out later that day.

Late Wednesday, the US Energy Information Administration (EIA) reported that Crude Oil stocks decreased by 6.8-M bbl last week, meaning they have now fallen for the 6th week running.

Gasoline inventories also fell, pointing to a strong start to the US driving season as motorists take advantage of lower motor fuel prices. Indeed refineries processed Crude Oilat a nearly record-high rate.

And despite the good news, WTI Crude Oil has not been able to extend its gains Wednesday afternoon. The reason is that the American Petroleum Institute (API) had already reported similar numbers Tuesday evening, so most of the good news was priced in.

Traders were cautious ahead of the monthly Crude Oil report from the International Energy Administration (IEA), after the EIA’s report had predicted a small rise in demand for Y 2015 of 20,000 BPD to 1.25-M BPD.

While the IEA also raised its demand forecasts the report conveyed a Bearish outlook as it said global production growth is ‘exceptionally high’ despite signs of a slowdown in non-OPEC supply, notably in the US.

Last week, OPEC agreed to maintain its 30-M BPD production quota unchanged for another 6 months. But according to the IEA, OPEC pumped more than 1-M BPD above this target for 3 months running. The largest OPEC producers have the valves wide open, with Saudi, Iraq and the UEA all pumping at record monthly rates in May.

The Crude Oil market surplus could hit new highs if Iran is allowed to make a full return to the market, with the deadline for the nuclear agreement, set for 30 June. It is also worth noting that if prices start to rise in earnest then US tight (shale) Oil companies may well ramp up production. There are 3 to 5-K finished well waiting to go on stream and the infrastructure is in place. An easy turn on if the price is right.

Be aware that the global supply surplus can remain in place for a lot longer than most expect. Thus providing a firm ceiling to prices medium term.

In the short term the demand outlook and the recent sharp falls in Crude Oil stocks, combined with a slightly weaker Buck, may provide some support for Crude Oil.

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Technical speaking

Both the major Crude Oil contracts, WTI and Brent, have pulled away after testing Key resistance marks in mid-week.

WTI stalled around that 61.70 mark. Some Bullish traders may have decided to book profit there and this has pressured prices, so it remains to be seen whether a closing break above 61.70 could be notched early next week. If so the Bulls may then aim for the early May high of 62.55 as their next Northside target.

Then the 200-Day MA comes in at 63.00, followed by the Fibo extension marks of the most recent downswing at 64.20 and 66.30. The long-term 38.2% Fibo retracement of the swing from June 2014 comes in at 67.10.

Support could be provided around 58.00 where the 50-Day MA converges with the Bullish trend line. As long at this mark holds as support the near-term technical outlook is Bullish. If broken then a move towards 54.00 could happen next week.

Brent has failed to break above its 61.8% Fibo mark of the most recent downswing at 66.30. If it breaks above that mark, then we could see the contract make a move towards the May high at 69.60 where meets the 200-Day MA.

So, the potential for a double top reversal around that mark is possible. The developing Bullish trend line has managed to hang tough after several tests, while a shorter-term Bear trend has broken.

Like WTI, for as long as price remains above the Bullish trend line, the near term technical outlook on Brent is Bullish.