Crude oil outlook remains negative

Crude oil prices bounced back immediately after the release of the weekly oil inventories data from the Energy Information Administration, earlier. The EIA reported that crude inventories rose by 2.4 million barrels last week. Analysts were looking for a 2.6 million-barrel build. So the headline figure was better than expected and there was further good news within the report, too. Crude stocks at Cushing fell by 0.6 million barrels, while stocks of gasoline (0.79m) and distillates (0.56m) also deceased. However, production rose further, climbing by another 0.4% last week.

The recent destocking of crude at Cushing has helped to alleviate concerns over excessive supply. However, it remains to be seen if the trend will continue. After all, the International Energy Agency (IEA) sees the global oil market as being sufficiently supplied as US production continues to rise. The IEA expects US oil output to rise by an additional 2.7 million to 12.1 million barrels per day over the next five years. The EIA assumes oil prices will remain low; if they were to increase, this forecast may have to be revised upwards as more companies will find it profitable to ramp up output. As a result of higher oil production in the US (and Canada and Brazil), the call on OPEC is therefore expected to fall. The EIA thinks it will decline to 31.8 million barrels per day in 2019. This would be BELOW the OPEC’s current production level. If the OPEC were to abandon its current production agreement, another supply war may begin. The OPEC may therefore have to extend its production agreement with Russia and co in order to avoid triggering another 2014-style sell-off in oil prices.

So fundamentally, we think that the upside for oil is likely to remain capped, unless there is an unexpected rise in demand growth beyond what is currently expected, or if there is a supply shock. Both cases look unlikely.

Meanwhile from a technical point of view, WTI’s near-term outlook looks neutral to slightly more bearish than bullish to me. The repeated failure of price to hold above the 2015 high of $61.55 makes me wonder whether we have seen a near-term top. Last week, WTI formed a bearish engulfing candle here, which is usually not a good sign. However, there hasn’t been any follow-through yet, which is usually not a bad sign.  That could change of course as we head towards the end of the week. If WTI fails to hold above $61.50 support then we could see some selling pressure coming in which could push prices below the recent low of $58.20 and towards $55.00 in the coming week. Conversely, if WTI were to climb above last week’s range at $64.20 and therefore break the $63.80 resistance then this could set us on course towards this year’s high of $66.60 and possibly towards the next psychological level of $70 next. I can’t see oil going significantly north of $70 due to the above fundamental factors.