Forex Trading Library

Oil slides as EIA drawdown less than expected

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Crude Oil prices are heading to a very bearish week with prices currently down by over 7.50% on a week to date basis. After closing last week at $49.18 a barrel, WTI Crude oil futures opened this week slight lower at $49.12 and after a brief rally to fill the weekend gap, prices extended their declines for the most part of the week, save for a modest rebound on Wednesday (API inventory), July 6th.

Yesterday (Thursday, July 7th), the weekly crude oil inventory report was released (it was delayed by a day as the US markets were closed on Monday). The drawdown continued in the inventory, which is now into a seventh consecutive week. However, the data showed that US commercial crude stockpiles fell by only 2.2 million barrels, to 524.4 million for the week ending July 1st. The drawdown was slightly below the forecasts of 2.3 million barrels.

EIA Crude Oil Inventories (For July 01, 2016): -2.2 million barrels (vs. exp. 2.3 million)
EIA Crude Oil Inventories (For July 01, 2016): -2.2 million barrels (vs. exp. 2.3 million)

The report was a surprise considering that the American Petroleum Institute’s (API) inventory report on Wednesday showed that stockpiles fell 6.7 million. The API’s report caused a brief spike in oil prices on Wednesday, which closed strongly higher and also set the stage for higher expectations from the EIA report, which eventually fell well short of what API reported.

US gasoline inventories were also seen to be weaker, falling 122k barrels against a forecast of 353k barrels amid increasing concerns of a supply glut in motor fuels, which is incidentally the peak driving season in the US. It was reported the containers carrying gasoline components were unable to unload at the New York Harbor due to the lack of space.

Oil prices were seen rallying over the past weeks in anticipation that the inventory drawdowns would continue amid the peak demand for gasoline in the US. However, with the EIA’s report showing otherwise and an increasing glut in gasoline, oil prices fell sharply.

Crude Oil – Technical Outlook

From a technical perspective, the oil price has turned quite interesting since the start of a new trading month. The chart below shows the monthly rolling oil contract chart where June’s price action closed in a doji. It gains significance following three straight months of gains. The monthly Stochastics also shows the hidden bearish divergence currently playing out, as prices form a lower (June) high at $51.66 and the higher Stochastics while, the higher (May 2015) high at $62.51 and the subsequent lower high in the Stochs.

WTI Crude Oil ($45.56) – Monthly Doji Close in June and hidden bearish divergence
WTI Crude Oil ($45.56) – Monthly Doji Close in June and hidden bearish divergence

Support is seen at 44.80 – 43.40, which remains an important level which needs to contain the declines to keep any hopes of further gains to the resistance at 54.88 – 55.0 levels. A breakdown below the support could potentially invalidate any upside bias, especially if resistance can be confirmed at the freshly broken support level.

WTI Crude Oil ($45.56) – Weekly Chart, price testing support at 44.80 – 43.40
WTI Crude Oil ($45.56) – Weekly Chart, price testing support at 44.80 – 43.40

On the daily chart, the price is seen edging lower to the support level seen at 44.50 – 44.0 which is also likely to be supported by the 200-day moving average. The bullish flag pattern remains in play as long as price doesn’t break out below this main support level. A weekly close below 42.37 – 41.75 could potentially shift the bias to the downside for a stronger correction to 38.25 where the next support level is seen.

WTI Crude Oil ($45.56) – Price likely to stay range bound
WTI Crude Oil ($45.56) – Price likely to stay range bound

In the near term, oil prices could remain range bound within 48/49 and 44/45 levels. The bullish flag keeps the bias to the upside, but a convincing break below 44/45 could give way for a stronger correction down to 38.25.

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