Crude oil trading outlook: futures extend rally, demand worries weigh

Both West Texas Intermediate and Brent crude rose for a fourth session on Tuesday amid technical signs prices may have bottomed out. However, weak fundamentals, including weak demand prospects from China, Russian output remaining close to a post-Soviet record and US crude supplies set to rise further, capped gains.

US crude for delivery in March traded 1.11% higher at $50.12 per barrel at 8:22 GMT, having shifted in a daily range of $50.46-$49.69. The contract rose by 2.76% on Monday to $49.57, the highest close since January 5th, after it earlier touched a 2-1/2-week intraday high of $50.56.

Meanwhile on the ICE, Brent for delivery in the same month was up 1.44% for the day at $55.54 per barrel. Prices ranged between $55.78 and $54.84. The European crude benchmark gained 3.32% on Monday to $54.75 a barrel, settling at a premium of $5.18 to its US counterpart. The gap widened to $5.42 on Tuesday.

Oil prices jumped sharply on Friday as a record weekly decline in active US oil rigs indicated that Saudi Arabias strategy to curb US production has begun to show results. According to data by Baker Hughes Inc., US drillers idled 94 oil rigs last week, the most since the company began tracking data in 1987, sending the total number of operating units to the lowest in three years.

Weak fundamentals

Moreover, some investors are betting that prices may have bottomed out, with technical indicators showing signs a rally might be at hand.

However, the lack of improvement in fundamentals kept gains limited. According to a Bloomberg survey, OPECs 12 members pumped 30.91 million barrels per day of crude in January, well above the group’s official target of 30 million bpd, which it reaffirmed at its last scheduled meeting on November 27th in Vienna.

Meanwhile, Russian crude production stood at 10.657 million bpd last month, close to Decembers post-Soviet record of 10.66 million, government data showed.

US crude output jumped by 27 000 barrels per day to 9.213 million bpd in the week ended January 23rd, a record for weekly statistics tracked since January 1983. Crude supplies rose by 8.874 million barrels during the same week to 406.7 million, the highest on weekly data spanning back to August 1982, while inventories at the Cushing, Oklahoma storage hub rose for an eight week to 38.9 million barrels, the most since January 2014.

Wednesdays supply report by the EIA is expected to show that crude stockpiles rose by 3.75 million barrels for the week through January 30th as refinery utilization rates probably fell by 1% to 87%. Motor gasoline inventories likely jumped by 1.9 million barrels and distillate fuel supplies dropped by 1.5 million. Stockpiles at Cushing probably jumped as well.

Industry group the American Petroleum Institute will release its separate private data later today. However, the trade associations figures are deemed less reliable than EIAs report as they are based on voluntary information provided by operators of refineries, pipelines and bulk terminals, while the government requires reports be filed with the EIA.

Analysts continue to monitor the United Steelworkers union’s strike, which began on Sunday with walkouts at nine US refineries after failing to agree on a labor contract with major oil companies. The union represents employees at more than 200 US refineries, pipelines, chemical plants and terminals. A prolonged nationwide strike action would imply curtailed US crude oil consumption and smaller refined product inventories, analysts say.

China worries

Also weighing on demand prospects, Chinas manufacturing sector contracted last month for the first time since September 2012, according to government data. The corresponding manufacturing PMI came in at 49.8 from 50.1 in December, defying analysts projections for a jump to 50.2.

A separate private gauge showed that factory activity in China declined for a second straight month. The HSBC China Manufacturing PMI rose to 49.7 in January from 49.6 in December, missing a preliminary reading of 49.8. China is the worlds second-biggest oil consumer and will account for 11% of global demand in 2015, according to the International Energy Agency.

Downbeat data from the US also helped cap gains in oil, although underlying fundamentals remained robust, as indicated by Federal Reserve officials at FOMCs meeting last week. Personal spending slid by 0.3% in December on a monthly basis, even as personal income rose 0.3%, matching a 0.3% decline in April 2013, which was the largest since September 2009.

Meanwhile, the Institute for Supply Management reported that manufacturing activity in the US grew at the slowest pace in 11 months in January, with the corresponding ISM Manufacturing PMI falling to 53.5 from 55.5 in December. Analysts had projected a drop to 54.5.

Analysts eyed the Labor Departments all-important jobs report for January, due on Friday, to assess the US economys recovery progress and oil demand prospects. US employers are expected to have added 234 000 jobs last month, while the unemployment rate likely remained at a multi-year low of 5.6%

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate March futures’ central pivot point is at $48.93. In case the contract breaches the first resistance level at $51.20, it may rise to $52.82. Should the second key resistance be broken, the US benchmark may attempt to advance $55.09.

If the contract manages to breach the first key support at $47.31, it might come to test $45.04. With this second support broken, movement to the downside could continue to $43.42.

Meanwhile, March Brent’s central pivot point is projected at $53.93. The contract will see its first resistance level at $56.44 If breached, it may rise and test $58.14. In case the second key resistance is broken, the European crude benchmark may attempt to advance $60.65.

If Brent manages to penetrate the S1 level at $52.23, it could continue down to test $49.72. With the second support broken, downside movement may extend to $48.02 per barrel.