WTI: Crude in technical bounce ahead of US oil stocks
Fawad Razaqzada June 6, 2017 6:01 PM
Although higher at the time of this writing, oil prices have been generally falling ever since that OPEC meeting on May 25.
Although higher at the time of this writing, oil prices have been generally falling ever since that OPEC meeting on May 25. Disappointed that the oil cartel and Russia could not come up with a bolder plan to reduce the global crude surplus, market participants have been selling into every bounce since. Yet at the same time, oil prices haven’t exactly collapsed, at least not in nominal terms anyway. After all, Saudi and co are at least trying to put a floor under prices by reluctantly limiting their oil production. This is likely to keep oil prices supported in the long-term, assuming that the Qatar situation does not scupper the OPEC’s efforts.
In the short-term, the focus of the oil market participants will turn to the US. Here, oil production and exports have been rising as OPEC countries lost market share. According to the EIA, US crude production averaged 9 million barrels per day in the first quarter, up nearly 200,000 b/d compared to the fourth quarter. About 900,000 b/d of US oil was exported to 24 different countries, compared to exports of 510,000 b/d in the previous three months. However, despite the increase in oil production, Q1 output was still down year-over-year and nearly 500,000 b/d less than levels hit in the first quarter of 2015.
So, the OPEC’s strategy to limit its oil production along with Russia and a few others hasn’t been a total failure. Indeed, US oil stocks have actually fallen for several weeks now, suggesting the glut may be falling after all. Any further sharp reductions in US stocks could put a floor under oil prices in the short-term. The API will be releasing its latest oil stocks data this evening, ahead of the official figures from the EIA tomorrow.
WTI has actually reached a key support area, which may help explain why it has bounced back today. As can be seen from the chart, the area between $46.75 and $46.95 was the last resistance zone prior to the rally that ultimately failed. Once resistance, it is now offering some support. Traders have respected this zone for three consecutive days now. In addition to resistance turning into support, this area represents the 61.8% Fibonacci retracement against the last rally. Thus, it is clearly a key area of support, which therefore means that in the event of a break down oil prices could sharply extend their losses. If this area were to break down in the next few days then this would end any bullish hopes in the short-term. As a result, WTI could then drop to test the next support at $46.05 and potentially drop all the way to its prior lows around the $43.80-$44.00 area next. Conversely, if support around the $46.75-$46.95 area holds and WTI manages to break a few short-term resistance levels, including $48.20, then we may see a sizeable bounce soon. For now, though, the structure of short-term lower lows and lower highs continue to hold. So, the path of short-term least resistance is still to the downside and will remain that way until the chart creates a decisive bullish pattern (for example, a clean break of $78.20 resistance level).
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.