Crude oil trading outlook: futures extend rout as UAE reaffirms output boost, US supplies

West Texas Intermediate and Brent crude extended an eight weekly decline after the United Arab Emirates said it will stick with plans to expand production in the next two years despite a global supply glut that slashed the market by more than a half. Expectations for a jump in US crude oil supplies offset a hefty gain in Chinese crude imports.

US crude for delivery in February slid 3.45% to $44.48 per barrel by 7:50 GMT, having earlier fallen to $44.41, the lowest since April 2009. The contract fell 4.74% yesterday to $46.07, the lowest settlement since the same month.

Meanwhile on the ICE, Brent futures for settlement in February fell 4.45% to $45.32 per barrel, with prices earlier dropping to $45.23 a barrel, the lowest since March 2009. The European crude benchmark slid 5.35% yesterday to $47.43, settling at a premium of $1.36 to its US counterpart. The gap narrowed to $0.84 on Tuesday.

Oil prices tumbled to the lowest in almost six years on Monday after Goldman Sachs and Societe Generale cut their oil price outlook for the year. Goldman predicted a further slump in prices before US producers cut investments, which in turn will ease a supply glut, allowing the market to balance itself out. Dutch bank ABN Amro also cut its outlook, while Australias Macquarie bank expects Brent to hover around $50-$60 per barrel in the first half, and jump to $85 in late 2015.

“To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer,” Goldman said in a report. “The search for a new equilibrium in oil markets continues.”

The bank said US crude will trade at $39 and $65 per barrel in six and twelve months, respectively, compared to previous projections for $75 and $80, while the outlook for Brent was slashed to $43 and $70 from $85 and $90 earlier. For the first quarter, WTI is projected at $41 and Brent at $42, the bank said.

OPEC stands firm

Meanwhile, the United Arab Emirates, OPECs fifth-largest producer, reaffirmed its plans to expand output capacity to 3.5 million barrels per day in 2017, ignoring a global supply overhang that has sent prices falling by 60% since a June peak. The country pumped 2.7 million bpd in December and currently has a capacity of 3 million bpd, according to estimates by Bloomberg.

UAE Energy Minister Suhail Al Mazrouei said yesterday: “In this time of unstable oil prices, we are showing in Abu Dhabi and across the country that we remain dedicated to reach our long-term production goals. Our investments remain there.”

OPEC, which accounts for about 40% of global supply, reached a collective decision on November 27th to keep its production quota unchanged, ignoring smaller members’ appeals to lower output in order to cushion a steep price drop. According to a Bloomberg survey, the oil cartel pumped 30.24 million bpd of crude in December, lower than November but still exceeding its official target.

Major OPEC producers have underscored their determination to protect market share and pump at the same pace, attributing the global supply overhang to record-high US production that reached 9.14 million bpd in the week through December 12th, 2014, and has remained an inch below that level ever since. Qatar estimates that the market swims in an oversupply of 2 million barrels per day.

US inventories

Exacerbating supply-demand imbalance concerns, early estimates by analysts show that US crude oil inventories probably rose by 1.75 million barrels in the week ended January 9th to 384.1 million. Distillate fuel inventories, which include diesel and heating oil, probably jumped by 2.1 million barrels last week, while gasoline inventories likely expanded by 3.75 million.

Last weeks report showed an unexpected decline in crude stockpiles of 3.062 million barrels, but supplies in Cushing, Oklahoma jumped and both fuel categories surged by a combined record of over 19 million barrels.

Some support was drawn as Chinas overall exports jumped by an annualized 9.7% in December, compared to forecasts for 6.8%, while imports fell by 2.4%, whereas analysts had projected a much steeper 7.4% drop. As a result, Chinas trade surplus narrowed to $49.60 billion from $54.47 billion.

In terms of crude oil, the Asian nation imported a record amount of the commodity, with inbound shipments surging 19.5% from November to 30.4 million tons. Crude imports surged for the first time above 7 million barrels per day in December, while for the entire year they rose 9.5% to 6.2 million barrels per day.

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate February futures’ central pivot point is at $46.63. In case the contract breaches the first resistance level at $47.63, it may rise to $49.20. Should the second key resistance be broken, the US benchmark may attempt to advance $50.20.

If the contract manages to breach the first key support at $45.06, it might come to test $44.06. With this second support broken, movement to the downside could continue to $42.49.

Meanwhile, February Brent’s central pivot point is projected at $48.19. The contract will see its first resistance level at $49.22. If breached, it may rise and test $51.01. In case the second key resistance is broken, the European crude benchmark may attempt to advance $52.04.

If Brent manages to penetrate the S1 level at $46.40, it could continue down to test $45.37. With the second support broken, downside movement may extend to $43.58 per barrel.