Crude oil trading outlook: futures swing back to losses as US output rises, Iraq to boost exports

West Texas Intermediate and Brent crude swung back to losses after sharp overnight gains as US crude output reached a new record and Iraq said it will boost exports within weeks, while banks continued to cut price estimates for the year.

US crude for delivery in February fell 1.28% to $47.86 per barrel by 8:02 GMT, having shifted in a daily range of $49.59-$47.54. The contract gained 5.64% yesterday to $48.48, the biggest gain since June 2012.

Meanwhile on the ICE, Brent for settlement in March was down 1.62% at $49.05 per barrel, with prices ranging between $49.75 and $48.63 for the day. The European crude benchmark jumped 4.27% yesterday to $49.86 per barrel. The February contract expires today.

Oil prices rebounded on Wednesday on technical trading and as traders covered themselves on expiring options, but the market was quick to return to losses as underlying fundamentals remained biased to the downside.

The Energy Information Administration reported yesterday that US crude oil inventories surged 5.389 million barrels in the seven days through January 9th to 387.8 million, while supplies at the Cushing, Oklahoma storage hub jumped to 33.9 million barrels from 32.1 million a week earlier.

US crude production rose by 60 000 barrels per day to 9.192 million bpd last week, hitting the highest level for weekly data dating back to January 1983. Refinery utilization rates slid to 91.0% from 93.9% during the preceding week and both distillate fuel and gasoline inventories scored gains, by 3.171 million and 2.925 million barrels, respectively.

The rise in US crude output comes even as prices continue to decline, having already dropped by about 60% since a June peak, pointing to evidence that improvements in the production technologies can sustain a high level of output even as investments are cut, rigs are idled and workers are laid off.

Tough to recover

However, with prices expected to regain some of the lost levels in the second half, the speed at which investment could return to shale output may impede a significant recovery.

Jeff Currie, Goldman Sachs’s New York-based head of commodities research, said for Bloomberg: “Shale has fundamentally changed this market. The lead time between when you put money in the ground and when you get production has collapsed from three to four years, all the way down to 30 days.”

The bank slashed its outlook for the year, predicting a further slump in prices before US producers cut investments, which in turn will ease a supply glut and allow the market to balance itself out. It expects US crude to 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.

Societe Generale also cut its forecasts, while US investment bank Jefferies International said it expects Brent to average $50.25 in 2015, $67.50 a barrel in 2016 and $77.25 a barrel in 2017, down from previous estimates for $72.25, $83 and $90 a barrel, respectively.

Adding to demand worries, the World Bank cut its global growth estimate this year citing subpar expansions in Europe and China, which sent oil, base and precious metals tumbling. The global economy is now expected to grow by 3% in 2015, compared to a previous projection for 3.4% made in June. The UN financial institution trimmed its outlook for China, saying it was undergoing a “managed slowdown”, while also cutting forecasts for the euro area and Japan.

OPEC determined

OPEC decided to not cut output at its latest scheduled policy meeting in Vienna on November 27th, triggering further sell-offs in the oil market. The group attributed the current global supply-demand imbalance to rising shale oil output in the US, saying that it bears on responsibility for the price fall and that the market will recover as accelerating global growth in the second quarter soaks some of the excess production. Kuwait estimates that the market suffers an oversupply of 1.8 million barrels per day.

Despite the oil rout, however, OPEC members are determined to protect their market share and follow their investment strategies. The United Arab Emirates, OPEC’s fifth-largest producer, reaffirmed plans to expand output capacity to 3.5 million barrels per day in 2017.

Meanwhile, Iraq will double exports in the upcoming weeks from its northern Kirkuk oil fields and continue to boost output from its main fields to the south. Kirkuk currently exports around 150 000 barrels per day of crude and will reach 300 000 bpd “in the coming weeks” Fouad Hussein, a member of the Kirkuk provincial council’s oil and gas committee, said for Bloomberg.

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate February futures’ central pivot point is at $47.47. In case the contract breaches the first resistance level at $49.92, it may rise to $51.37. Should the second key resistance be broken, the US benchmark may attempt to advance $53.82.

If the contract manages to breach the first key support at $46.02, it might come to test $43.57. With this second support broken, movement to the downside could continue to $42.12.

Meanwhile, March Brent’s central pivot point is projected at $49.00. The contract will see its first resistance level at $51.23. If breached, it may rise and test $52.59. In case the second key resistance is broken, the European crude benchmark may attempt to advance $54.82.

If Brent manages to penetrate the S1 level at $47.64, it could continue down to test $45.41. With the second support broken, downside movement may extend to $44.05 per barrel.