Oil prices rally to 6-week high on inventory drawdown

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Crude oil prices maintained the bullish winning streak for 5 straight days as prices touched a 6-week high on Wednesday. WTI Crude futures contract for September delivery closed at $46.92 a barrel after the weekly inventory report showed an unexpected drawdown. Oil prices extended their gains after the US Energy Information Administration (EIA) weekly report showed that crude oil inventories fell 2.5 million barrels last week. This surprised analysts who penciled in a 522k million in inventory build-up. The week before US crude oil stockpiles showed a surprise build up which lasted for three consecutive weeks, while US oil rigs continued to rise as well for seven straight weeks.

EIA Crude Oil Inventories: -2.508 Million vs. 0.522 Million
EIA Crude Oil Inventories: -2.508 Million vs. 0.522 Million

Earlier in the week on Tuesday, API Crude oil inventory report showed a drawdown of 1 million barrels. Gasoline stockpiles fell 2.7 million barrels, exceeding expectations of a 1.6 million drawdown. However, oil prices continue to remain volatile as news reports suggested that Saudi Arabia could start boosting its oil output once again with estimates showing that the oil output could exceed that of Russia’s. Meanwhile, in the background the OPEC meeting in September which has sparked rumors for a global output cut continued to weigh on oil traders.

Saudi expected to increase production. Iran oil production at 2.1 million barrels

Saudi Arabia is being reported to have pumped 10.67 million barrels per day in July, compared to the previous record output of 10.56 million June 2015. Industry officials in Saudi Arabia were quoted as saying that output would increase in order to meet the summer demand.

Tariq Zahir, the Oil trader at Tyche Capital Advisors, told Reuters that “One certain thing to be aware of is the Reuters report that Saudis may increase production to new record highs pushing near 11 million barrels per day. With the U.S. rig count coming back online for several weeks, even if a freeze did happen we would be talking about freezing at higher levels of output.”

Iran has also been pumping oil at record production levels. Earlier this week, state news agency reported that Iran’s crude oil exports in July were more than 2.1 million barrels per day. Mohsen Ghamsari, Director of the International Affairs Department at National Iranian Oil Company, said, “Exports of crude are now at a good level but … have not yet touched that of the pre-sanction level.” Ghamsari said that Iran used to export 2.35 million barrels of Crude oil per day before the sanctions were imposed. He, however, refrained from giving a figure on oil exports.

WTI Crude Oil – Technical Outlook

Oil prices are seen trading close to the 48.10 – 49.50 resistance level that previously gave way which was followed by sharp declines to $39.80. While the 200 and 50 period moving averages remain bullish, the Stochastics oscillator is currently very overbought with a hidden bearish divergence currently seen against the lower high in prices and the higher highs in the Stochastics oscillator.

Oil Chart ($47.70) – Price nearing resistance level
Oil Chart ($47.70) – Price nearing resistance level

If the current rally fails to breakout above 48.10 – 49.50 resistance level, then we could expect a near-term correction to oil prices. $43.50 – $43.00 remains the immediate support level of interest on this pullback. In the medium term, oil prices could remain range bound within the resistance level at 48.10 – 49.50 and the support at 43.50 – 43.00 with further bias likely to be established on a breakout of these levels.

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