Crude oil trading outlook: oversupply holds futures near 2009 lows

Both West Texas Intermediate and Brent crude remained near the lowest levels in 5-1/2 years as global oil oversupply showed no signs of receding, with Saudi Arabias oil minister saying the price slump was temporary.

US crude for delivery in February traded at $54.73 per barrel at 8:10 GMT, up 0.68% on the day, having shifted in a daily range of $55.47-$54.53. The contract plunged 4.28% to $54.36 on Wednesday, the lowest settlement since May 2009. Prices are headed for a fourth weekly decline.

Meanwhile on the ICE, Brent for delivery in the same month was up 0.24% at $59.41 a barrel. Prices held in a daily range of $60.01-$59.26. The European benchmark crude dropped 3.12% to $59.27 on Thursday, also the lowest close since May 2009. Brent traded at a premium of $4.68 to its US counterpart, down from yesterdays settlement at $4.91.

Oil was headed for a fourth weekly decline after OPEC, led by Saudi Arabia, decided not to trim its collective output last month. The groups decision was mirrored by Russia, which is expected to pump close to its current output of 10.6 million bpd in 2015, while US production reached a new record last week.

Saudi Arabia Oil Minister Ali Al-Naimi said that the it was impossible for OPEC to alone cut output to prevent a further slump in oil, while others are boosting production, as that would reduce the groups market share and not guarantee a price stabilization. He added that oil markets were suffering a “temporary” instability mainly due to a slowdown in the global economy and as economic expansion resumes, it would spur demand.

OPEC pumped 30.56 million barrels per day in November, according to a Bloomberg survey, exceeding its 30-million production target, while US crude output surged to 9.137 million barrels per day in the week through December 12th, the highest on weekly data records started in January 1983.

Iran discounts

Joining up on Saudi Arabias stance not to cede market share, Iranian Oil Minister Bijan Namdar Zanganeh said earlier in the week that Iran won’t lose market share under any conditions, given the restriction of its exports in recent years due to Western sanctions regarding its nuclear program.

Iran was reported to be offering shipments to Asia at the largest discount in 14 years, following lead producer Saudi Arabia’s move to slash price differentials.

Jonathan Barratt, the chief investment officer at Ayers Alliance Securities in Sydney, said for Bloomberg: “Oversupply is the name of the game. The price action that we’ve seen has been really negative and there’s a lot of volatility.”

According to analysts at Credit Suisse, US crude production is expected to jump by 800 000 barrels per day next year. Companies around the world have put upstream investment plans on hold as oil prices fell by nearly 50% since a June peak.

CNBC reported that Marathon Oil cut 2015 capital expenditures by 20%, while Chevron put on hold plans to drill in the Beaufort Sea in Canada’s Arctic. Canadian producers acted in a similar matter, with Penn West Petroleum, Husky Energy and MEG Energy all trimming capital spending.

Moreover, apart from scaling back investment projects, oil companies will need to cut expenditure by another $170 billion next year to maintain their debt levels, energy consultancy Wood Mackenzie forecast, with only three of the top 40 international oil companies generating sufficient cash flows at current price levels to cover spending.

US supplies

Data by the Energy Information Administration showed on Wednesday that US crude oil inventories fell by 0.847 million barrels in the week ended December 12th, while supplies at the Cusihng, Oklahoma storage hub surged by 2.92 million barrels to 27.8 million, the highest since March.

Total motor gasoline inventories surged by 5.250 million barrels last week to 222.0 million, exceeding analysts’ projections for a jump to 1.780 million. Distillate fuel supplies declined by 0.207 million barrels to 121.5 million, beating estimates for a 0.340-million jump.

US economic recovery

Albeit boosting the dollar, and thus weighing on dollar-denominated commodities, Fed comments backing an interest rate hike in 2015 reinforced the view of a robustly recovering US economy, which implies higher oil demand in the long-term.

Fed Chairwoman Janet Yellen told reporters after FOMC’s last meeting for the year that the central bank will likely hold rates near zero at least through Q1 2015, which analysts interpreted as a hike in the second half of the year. She also laid out the economic objectives that need to be achieved and that the rate increase will be gradual, with borrowing costs expected to reach “normal” levels probably not earlier than 2017.

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate February futures’ central pivot point is at $55.89. In case the contract breaches the first resistance level at $57.51, it may rise to $60.65. Should the second key resistance be broken, the US benchmark may attempt to advance $62.27.

If the contract manages to breach the first key support $52.75, it might come to test $51.13. With this second key support broken, movement to the downside could continue to $47.99.

Meanwhile, February Brent’s central pivot point is projected at $60.71. The contract will see its first resistance level at $62.26. If breached, it may rise and test $65.24. In case the second key resistance is broken, the European crude benchmark may attempt to advance $66.79.

If Brent manages to penetrate the first key support at $57.73, it could continue down to test $56.18. With the second support broken, downside movement may extend to $53.20 per barrel.