Forex Trading Library

Oil fails to recover on lower inventory build

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US Crude Oil inventories rise at a slower pace of 2.29 million barrels for the week ending March 25th, 2016

Summary:

  • After rallying to a 4-month high, WTI Crude Oil prices retreat steadily
  • Saudi Arabia – Kuwait talk on re-opening Khafji Oilfield, expected to add 300k barrels extra
  • US Oil inventories for week ending March 25th rose 2.29 million, less than 3.2 million forecast
  • OPEC Oil Output rises 100k in March, to 32.47 million barrels/day according to a Reuters survey
  • April 17th meeting to further talks of Oil freeze production

Crude Oil prices were showing signs of reversing some of the losses from the past five days but failed after giving back the gains and instead closed lower. US Department of Energy’s weekly Crude oil inventory report for the week ending March 25th showed a buildup of 2.29 million barrels against forecasts of 3.1 million. The slower pace of inventory comes after the previous week notched a massive 9.4 million in build up, according to data released by the Energy Information Administration yesterday. Previously, the American Petroleum Institute’s gauge of inventory showed a build of 2.6 million barrels, which also missed forecasts of 3.2 million barrels. Cushing saw a drawdown of 319k barrels while Gasoline inventory fell -1.94 million barrels.

On the geopolitical side, earlier this week, news reports surfaced that Saudi Arabia and Kuwait were restarting production from the Khafji Oilfield, which is expected to add 300,000 barrels per day. The reports raise questions on the level of commitment from the major oil producers who just last month discussed talks of freezing Oil production levels. The agreement, initially formulated in Qatar saw Saudi Arabia and Russia spearheading the idea and was later joined by other countries including Venezuela. Iran flip-flopped on the idea as the country remains adamant to increase Oil production to gain its lost market share. Major oil producers are expected to meet again in April to further the talks. WTI Crude Oil futures posted a steady decline following a strong rally which pushed prices to a 4-month high at $42.48, but Oil prices started to decline steadily since then.

Crude Oil Technical Outlook

The weekly chart for Oil shows prices forming an inside bar last week alongside the hidden bearish divergence. A weekly close below the lows of $37.71 could confirm a potential correction to this short term rally. Support on the weekly chart is identified at $32.70 – $36.20, which marks the breakout from the long-term falling trend line.

Crude Oil Weekly Chart (Continuous Contract) – Inside Bar with bearish divergence
Crude Oil Weekly Chart (Continuous Contract) – Inside Bar with bearish divergence

On the daily chart, we can see that prices are continuing their declines following a brief rally to the 200-day moving average. However, short-term support is seen near $38.25 – $38.10, which could hold prices in the near term unless there is a convincing break of this support level. To the downside, the next main support comes in near the $33.70 – $32.70 level, confirming the weekly support level as well.

Crude Oil (Continuous Contract) – Daily Chart, minor support at $38.25 - $38.10
Crude Oil (Continuous Contract) – Daily Chart, minor support at $38.25 – $38.10

Finally, on the one-hour chart, while prices did not rally back to the $40.50 – $40.40 support/resistance level, we still expect prices to move back in the near term. There is a bearish divergence currently playing out on the chart but with Oil closing below the $38.25 – $38.10 support, we anticipate further downside in store.

Crude Oil (CL_6K, May Contract) – H1 Chart, break of support at $40.5/40.5 could see a dip to $38.25/38.10
Crude Oil (CL_6K, May Contract) – H1 Chart, break of support at $40.5/40.5 could see a dip to $38.25/38.10

In conclusion, we expect to see Crude Oil’s momentum ease back following the previous months of steady gains. The $40.40 – $40.50 will be a key level to watch if resistance is established, which could see prices move lower towards $33.70 – $32.70 support.

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