Crude oil trading outlook: futures extend drop after bearish US supply data

Both West Texas Intermediate and Brent benchmark crudes fell to a one-week low and hovered near the lowest in years after data by the EIA showed a larger-than-expected build in US crude inventories, while domestic production remained near the highest in almost three decades. A pickup in Chinese manufacturing activity gave some support, but only to a limited extent.

December US crude traded 0.25% lower at $80.32 per barrel at 7:06 GMT, having earlier fallen to a one-week low of $80.05, close to last Thursdays more than two-year trough of $79.10. The contract slid 2.4% on Wednesday, the most in more than a week, to $80.52, the lowest settlement since October 13th.

Meanwhile on the ICE, Brent for delivery in the same month stood at $84.40 a barrel, down 0.37% on the day. Prices shifted in a daily range between a one-week low of $84.23 and $84.99. The European benchmark crude lost 1.75% on Wednesday, also the most in more than a week, to settle at $84.71, the lowest since October 15th. Brent traded at a premium of $4.08 to its US counterpart, down from yesterdays settlement at $4.19.

Oil prices erased their weekly gains after the EIA reported on Wednesday that US crude oil inventories jumped by 7.11 million barrels to 377.7 million in the week ended October 17th, exceeding analysts’ projections for 3-million increase. This was the highest inventory level since July. Supplies at Cushing, Oklahoma, the biggest US storage hub and delivery point for NYMEX-traded contracts, rose to 20.6 million barrels from 19.6 million a week earlier.

The larger-than-projected build came amid a typical for the maintenance period lower utilization rate, while domestic crude production stood near the highest in almost three decades.

Refineries operated at 86.7% of their operable capacity, down from 88.1% a week earlier, while US crude output was at 8.934 million barrels per day, close to last week’s 8.951 million bpd, which was the highest since June 1985.

Imports fell by 263 000 barrels per day to 7.477 million bpd, while the four-week average of imports slid to 7.553 million bpd, down 5.8% from a year earlier. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 438 000 barrels per day, while distillate fuel imports averaged 89 000 bpd.

The report also showed that total motor gasoline supplies fell by 1.3 million barrels to 204.4 million, largely in line with analysts’ projections. Distillate fuel stockpiles, which include diesel and heating oil, rose by 1.05 million barrels to 125.7 million, confounding projections for a 1.5-million drop.

Hong Sung Ki, a commodities analyst at Samsung Futures Inc. in Seoul, said for Bloomberg: “Oil’s getting a downward push today due to the expanding stockpiles data. Crude has almost hit its floor but until OPEC cuts production, I don’t see any factors that will drive prices up.”

OPEC prices

Samir Kamal, Libya’s governor to the Organization of the Petroleum Exporting Countries, said that the group should cut output by 500 000 barrels per day to reign in the markets oversupply. The group pumped 30.47 million bpd in September, the most since August 2013.

Market players watched closely for any shift in OPEC’s production policy but its biggest producers have indicated their reluctance to lower output and lose market share and instead responded with price cuts.

Venezuela’s foreign ministry said on October 10th that the country will seek an extraordinary OPEC meeting to discuss falling prices. However, oil ministers from Kuwait and Algeria dismissed possible output reductions. Ali al-Omair, Kuwait’s oil minister, said for the official Kuwait News Agency that while producers would like higher prices, there was “no room” to achieve that by cutting output.

The 12 members are set to meet in Vienna on November 27th and any cut in output before that is rather unlikely.

However, banks including BNP Paribas SA and Bank of America Corp. predicted the slide might be over soon as they expected OPEC to reduce production. At the same time Goldman Sachs disputed the global supply glut, saying it was yet to materialize, and noted prices have dropped too much and too early.

Economic growth

Economic data from the US provided some support. Strong housing and industrial production numbers this week and the last, as well as initial jobless claims falling to the least in fourteen years, sparked some confidence among investors. US demand is expected to rebound as the maintenance period draws closer to an end, setting up the stage for a jump in refinery utilization rates. Muted consumer inflation, reported by the Labor Department on Wednesday, suggested the Federal Reserve has more room for accommodation policy, curbing speculation for an earlier interest hike.

Rising crude demand from China in September also fanned some positive sentiment, offsetting the slowest GDP growth in more than five years in the third quarter. Speculations that China will need to introduce additional monetary stimulus to prevent a sharper decline in economic activity also added a positive note for oil.

Nevertheless, IMFs downward revision of its 2015 global growth forecast had left its mark, coupled with IEAs lowered global crude demand growth this year.

Manufacturing

On the bright side, a preliminary gauge showed that Chinas manufacturing activity edged up to a three-month high in October, although the level of output at factories fell to the lowest in five months.

The flash HSBC Flash China Manufacturing PMI registered at 50.4 in October from 50.2 in September, exceeding analysts projections for a jump to 50.3. The Manufacturing Output Index fell to 50.7 from 51.3 in September. Both employment and inventory indices improved, but disinflation pressures intensified.

“While the manufacturing sector likely stabilized in October, the economy continues to show signs of insufficient effective demand,” said Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said. “This warrants further policy easing and we expect more easing measures on both the monetary as well as fiscal fronts in the months ahead.”

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate December futures’ central pivot point is at $81.30. In case the contract breaches the first resistance level at $82.37, it may test $84.23. Should the second key resistance be broken, the US benchmark may attempt to advance to $85.30.

If the contract manages to breach the first key support at $79.44, it might come to test $78.37. With this second key support broken, movement to the downside could continue to $76.51.

Meanwhile, December Brent’s central pivot point is projected at $85.42. The contract will see its first resistance level at $86.36. If breached, it may rise and test $88.02. In case the second key resistance is broken, the European crude benchmark may attempt to advance to $88.96.

If Brent manages to penetrate the first key support at $83.76, it could continue down to test $82.82. With the second support broken, downside movement may extend to $81.16 per barrel.