Crude oil trading outlook: futures decline on record US stockpiles, Saudi comments support

West Texas Intermediate and Brent crude fell on Thursday after a sharp rally the previous session as investors weighed record high US crude inventories and output versus better-than-expected China manufacturing data and comments of optimism by Saudi Arabias oil minister.

US crude for delivery in April traded 0.90% lower at $50.53 per barrel at 8:06 GMT, shifting in a daily range of $51.22-$50.41. The contract surged by nearly 3.5% on Wednesday to $50.99, having earlier fallen to a three-week low of $48.43. Prices are down ~0.5% for the week so far.

Meanwhile on the ICE, Brent for settlement in the same month traded 0.36% lower at $61.41 a barrel, holding in a daily range of $61.87-$61.10. The European crude oil benchmark rose by nearly 5.1% yesterday to $61.63, having touched a one-week high of $62.20. Brent traded at a premium of $10.88 to its US counterpart, up from Wednesdays settlement at $10.64.

Saudi Arabias oil minister Ali al-Naimi said yesterday that oil demand is on the rise and the market has turned calm, offsetting bearish sentiment fanned by EIAs weekly oil inventories numbers. The kingdom also plans to become the second-biggest exporter of refined oil products after the US, al-Naimi said, without specifying any dates.

Saudi Arabia steered the Organization of the Petroleum Exporting Countries on a November 27th meeting in Vienna into retaining its established collective production quota of 30 million barrels per day, in a push to curb US shale oil production. US drillers have idled 35% of active rigs in the past 11 weeks, although total US output remains at the highest in more than 40 years.

US inventories expand

Ric Spooner, chief analyst at CMC Markets in Sydney, said for CNBC: “The previous gains reflected the fact that the market is looking forward to more production cuts coming with declines in rig counts. But it is a conflict play between production and demand. Certainly, production is exceeding demand, at least in the U.S.”

The Energy Information Administration reported yesterday that US crude oil stockpiles surged by 8.427 million barrels in the seven days through February 20th to 434.1 million, the highest in at least 80 years. Last weeks gain was more than double analysts expectations for an increase of 3.98 million barrels. Stockpiles at the Cushing, Oklahoma storage hub rose to 48.7 million barrels from 46.3 million a week ago, the highest in at least a year.

Domestic crude production jumped by 5 000 barrels per day to 9.285 million bpd, the highest since 1972, while refinery utilization rates slid to 87.4% from 88.7% a week earlier. Motor gasoline inventories fell by 3.118 million barrels to 240.0 million, while distillate fuel stockpiles, which include diesel and heating oil, declined by 2.711 million barrels to 124.7 barrels.

Spelling trouble for near-term US crude demand, the United Steelworkers union extended a strike this week that has affected more than 6 500 union workers at 15 plants, including 12 refineries which account for a fifth of US refining capacity, with no prospects of talks resuming this week. The union initiated the walkout on February 1st due to a wage dispute after rejecting several offers by oil companies, led by Royal Dutch Shell, and has dismissed 7 offers so far. Prolonged strike action implies lower refining capacity, thus lower crude demand and a drop in inventories of refined oil products.

However, support was drawn yesterday after private data showed a surprising expansion in Chinas manufacturing activity in February, defying projections for a third month of contraction. The HSBC Flash China Manufacturing PMI rose to a four-month high of 50.1 from 49.7 in January, compared to expectations for a drop to 49.5, while the manufacturing output index reached a five-month high of 50.8.

The oil market also benefited from a successful extension of Greece’s bailout program, which eased fears of a Greek euro-area exit that could destabilize the single-currency bloc. Fed Chairwoman Janet Yellen saying in a testimony before the US Congress that an interest rate hike is not imminent also proved supportive.

In economic news, new homes sales in the US contracted less than expected in January, Commerce Department data showed yesterday, and analysts eyed today key important economic figures from Europe and the US, including German employment data, preliminary UK GDP reading, business and consumer confidence in the Eurozone and consumer inflation and durable goods orders in the US.

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate April futures’ central pivot point is at $50.23. In case the contract breaches the first resistance level at $52.04, it may rise to $53.08. Should the second key resistance be broken, the US benchmark may attempt to advance $54.89.

If the contract manages to breach the first key support at $49.19, it might come to test $47.38. With this second support broken, movement to the downside could continue to $46.34.

Meanwhile, April Brent’s central pivot point is projected at $60.75. The contract will see its first resistance level at $63.08. If breached, it may rise and test $64.54. In case the second key resistance is broken, the European crude benchmark may attempt to advance $66.87.

If Brent manages to penetrate the S1 level at $59.29, it could continue down to test $56.96. With the second support broken, downside movement may extend to $55.50 per barrel.