Why Crude Oil Rising Despite Higher US Inventories?

Feb 09 2017, 12:12 pm
Crude Oil rising_OPEC_0902

Abdalla Salem El-Badri, Secretary General of OPEC.

Since the beginning of the year, Crude Oil prices has been trading within a sideways trend. WTI is trading between $51 and $54, while Brent is stuck between $54 and $57, New with no clear direction.

This is also despite the fact of the successful OPEC deal in addition to the excessive inventories in the US. In today’s article, we will explain the reasons behind the tight range, what’s after OPEC deal and why the prices are reacting differently to higher inventories.

OPEC: Successful Deal

A few days ago, OPEC announced its monthly production figures, which showed that the entire members reached their commitments.

OPEC produced 32.2 Million barrels in January, while their target was around 32.5 Million barrels, down from its November peak when the production reached a record of 34.3 Million barrels.

Moreover, the numbers showed that December production decreased all the way back to 33.3 Million barrels. So in total, this is the second monthly decline in a row, one we have not seen since 2013.

Stabilization or Storm Ahead?

Despite OPEC announcement, Crude prices remained within the same tight range mentioned above, with no clear direction. Some would say that Oil prices has finally stabilized.

This might be the case, but we should not forget the history. Oil prices has been rising since the beginning of last year, when OPEC members proposed a deal to freeze the production, saying that they will reach a deal soon.

However, they never did or agree on such deal until late of last year. The prices already went up by more than 100% from its lows, whether for Brent or WTI Crude.

This means that the decision (Freeze & Cut) is already priced-in in full. The rise from January to November of last year was due to the anticipation of a production freeze, while the notable rally in December was due to the production cut deal.

Therefore, traders should not anticipate a notable rise over the coming weeks, as the deal is already priced in and now we need to look for new catalysts.

Higher US Inventories = Higher Oil?

For the past five weeks, the prices acted differently to the US Crude Oil Inventories data. The US crude oil inventories posted a surplus for the 5th week in a row. One we have not seen since the beginning of 2016.

Despite that, looking at the price action, the prices jumped right after the news was announced. Why? This is due to many factors.

The first one is the earlier read from the API, which comes one day before the EIA figures. Therefore, the main impact was when the API data is announced.

Yesterday, the US inventories increased by the most since the end of October of last year, building more than 13.83, which is very close to the API data. This explains the reasons behind the notable decline on Tuesday with more than 1.5% declines in both Brent and WTI. While yesterday’s spike was just a short covering of the day before trades.

What’s Next?

In the meantime, the stabilization is likely to continue. However, global growth and demand data will be the key from now on. But traders need to keep an eye on OPEC remarks on whether if they will extend the ongoing deal or not.

From a technical point of view, there is no clear signal, the sideways trend is here to stay until one of those levels is broken. A break of which should give us the first signal to move on, whether to buy or to short.

Yet, traders can always benefit from the current price action, selling at resistances and buying at support areas with very tight stop, which I suggest to be this year’s lows or this year’s high, depends on what’s your position.

Nour Eldeen Al-Hammoury

Nour Eldeen Al-Hammoury has more than ten years of experience in focusing on foreign exchange and global economic developments, as well as central bank policies and intermarket analysis (global markets relationships). Nour Eldeen is a regular on many major TV networks (several times each) such as: BBC Radio, BBC World News, Al-Jazeera, Al-Hurra TV CNBC Europe, CNBC Asia, CNBC Arabia, Al Arabiya, Bloomberg, Russia Today, Dubai TV, Sama Dubai, Skynews Arabia, Qatar TV and Future TV News.