Crude oil trading outlook: futures extend rout on record US inventories, global supply overhang

Both West Texas Intermediate and Brent crude extended losses on Thursday as US crude output remained near the highest in more than three decades, while inventories surged to a record and OPECs production pace exceeded a collective target for an eight month.

US crude for delivery in March traded at $47.81 per barrel at 8:14 GMT, down 1.32% on the day, having shifted in a daily range of $49.03-$47.36. The contract plunged 8.67% yesterday to $48.45, the biggest drop since November 28th, paring the prior four sessions combined gain of almost 19%.

Meanwhile on the ICE, Brent for settlement in the same month slid 1.51% to $53.34 per barrel, holding in a daily range of $55.01-$53.07. The European crude benchmark tumbled 6.48% on Wednesday to $54.16. Prices had rebounded almost 25% on Tuesday since January 13ths 6-year low of $46.40. Brent was at a premium of $5.53 to its US counterpart, down from Wednesdays settlement at $5.71.

Oil prices surged in the four sessions through Tuesday on hopes that a record cut in the number of US drilling sites and further reductions in oil companies’ capital expenditures will curb shale output and balance out the market. Data by Baker Hughes Inc. showed on January 30th that US drillers idled 94 oil rigs in a week, the most since the company began tracking data in 1987, sending the total number of operating units to the lowest in three years.

However, renewed oversupply fears sent the market tumbling on Wednesday as the Energy Information Administration reported that US crude oil inventories surged by 6.333 million barrels in the week ended January 30th to 413.1 million barrels. This was the highest for weekly EIA data spanning back to 1982 and the highest since 1931 for monthly data.

Supplies at the Cushing, Oklahoma storage hub jumped from 38.9 million barrels a week earlier to 41.4 million, the highest in a year. Inventories there have doubled since October 17th.

US crude output slightly eased to 9.177 million barrels per day from 9.213 million during the previous week, which was the highest on weekly data spanning back to January 1st 1983. Domestic production has remained above 9 million bpd for each week since October.

Moreover, crude demand may fall further as a workers strike initiated by the United Steelworkers union over wages continued at nine sites, including seven refineries accounting for 10% of US refining capacity. The walkout began after the union, which represents employees at more than 200 US refineries, pipelines, chemical plants and terminals, rejected five propositions by oil companies, led by Royal Dutch Shell, since talks began on January 21st.

US refineries operated at 89.9% of their operable capacity last week, up from 88% the preceding one, but both gasoline and distillate fuel output fell. Motor gasoline stockpiles jumped by 2.335 million barrels to 240.7 million last week, while distillate fuel inventories rose by 1.788 million barrels to 134.5 million, both underperforming analysts projections.

Imbalance seen lasting

Analysts expect the global supply overhang, which sent the market tumbling more than 50% since a June peak, to last until at least the first half of 2015 as US production is expected to continue to expand, while OPEC stands firmly behind its decision not to cut output. The Energy Information Administration projects US production to reach 9.31 million bpd this year, while a survey by Bloomberg showed that OPECs 12 members pumped 30.91 million bpd in January, exceeding its 30-million target for an eight month.

Some investors have been betting that idling less effective oil rigs and cutting investment plans will curb US production, but immediate concerns of a continuously oversupplied market offset those speculations as US output remained close to a record.

“Production from existing completed wells is currently unaffected and is contributing to consistent weekly stock builds,” analysts at BNP Paribas said in a note, cited by CNBC. “The resulting drop in demand for crude at refineries is likely to lead to further large crude inventory builds,” referring to the union strike in the US.

Demand worries from China have also been weighing on the market as the worlds second-biggest economy expanded at the slowest pace since 1990 last year, while both private and government data showed a contraction in the countrys manufacturing sector in January.

Some support was drawn on hopes of further monetary easing by the Peoples Bank of China after the central bank yesterday reduced its minimum reserve requirement ratio for banks by 1% to 19.5%.

In the US, data by Automatic Data Processing showed yesterday that private non-farm employers added 213 000 jobs in January, while the Labor Department is expected to report today that the number of Americans who filed for initial unemployment benefits last week rose to 290 000 from 265 000 the previous period.

Analysts now eyed Fridays all-important jobs report, with the Labor Department expected to report non-farm payrolls at 234 000, while the unemployment rate likely remained unchanged 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 $49.65. In case the contract breaches the first resistance level at $51.36, it may rise to $54.26. Should the second key resistance be broken, the US benchmark may attempt to advance $55.97.

If the contract manages to breach the first key support at $46.75, it might come to test $45.04. With this second support broken, movement to the downside could continue to $42.14.

Meanwhile, March Brent’s central pivot point is projected at $55.24. The contract will see its first resistance level at $56.98. If breached, it may rise and test $59.80. In case the second key resistance is broken, the European crude benchmark may attempt to advance $61.54.

If Brent manages to penetrate the S1 level at $52.42, it could continue down to test $50.68. With the second support broken, downside movement may extend to $47.86 per barrel.