Oil starting to pull back from 2016 highs

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Crude Oil futures for June delivery settled yesterday at $48.43 a barrel, with current price action seeing a follow through of the declines from yesterday. The weekly crude oil inventory report showed a surprise 1.3 million barrel buildup in commercial Crude oil stockpiles for the week ending May 13th, less than analyst expectations of a 3.1 million drawdown. In the previous week, crude oil inventories fell 3.4 million barrels. The Energy and Information Administration’s (EIA) report contrasted yet again with the American Petroleum Institute’s (API) weekly inventory report released on Tuesday, which showed a 1.2 million drawdown.

The EIA report showed that gasoline production fell averaging 10 million barrels per day while distillate fuel production increased on average about 4.8 million barrels per day. The EIA said, “U.S. crude oil inventories are at historically high levels for this time of year.” Oil prices had briefly dipped after the release but edged higher against a stronger US dollar which rose steadily ahead of the FOMC meeting minutes.

Weekly Inventory Report – API (-1.140Mn) For May 13, 2016
Weekly Inventory Report – API (-1.140Mn) For May 13, 2016
Weekly Inventory Report – EIA (1.31Mn) For May 13, 2016
Weekly Inventory Report – EIA (1.31Mn) For May 13, 2016

This week, Goldman Sachs joined the Oil bull-wagon forecasting WTI’s price at $45 a barrel for Q2 2016 while it expects WTI to average at $50 a barrel in the second half of the year. GS notes that the higher prices will likely bring low-cost producers back into the market. This is expected to see a gradual decline in oil inventories throughout the second half of 2016 with expectations that oil could return to surplus during the first quarter of 2017.

Crude Oil Technical Outlook

  • The weekly chart for crude oil saw prices retreating from the recent highs
  • The weekly hidden divergence remains in play, and as long as the $50.92 high of 9th October 2015 is not breached, price action is looking weak to the upside
  • Support at 44.90 – 43.95 remains critical to confirm this view
  • A weekly close below this major support/resistance level could confirm the weakness in price for a test of support at 41.21 – 40.27
Crude Oil Weekly Chart (Continuous Contract)
Crude Oil Weekly Chart (Continuous Contract)

On the daily chart, price action is showing signals of a reversal near 49.5 – 48.10 levels. This could see a move towards 44.50 – 44.0 region in the near term and Oil prices could remain range bound within these price levels. A break below 44.0 could, however, see a further decline to $41.21 – $40.27 and $38.25 support level.

Crude Oil (Continuous Contract) – Daily Chart
Crude Oil (Continuous Contract) – Daily Chart

On the 4-hour chart for the Crude Oil futures, the past two sessions declines are likely to dip towards $46.77 – $46.55 immediate support. A bounce off this support could see a short term test back to $48.10 levels. Below 46.77 – 46.55, the next support is at 45.58 – 45.38.

Crude Oil futures - June delivery H4 Chart
Crude Oil Futures – June delivery H4 Chart

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