Crude oil trading outlook: Brent futures hit 4-year low on China data, US inventories eyed

Brent crude fell to the lowest in more than four years on Wednesday, while West Texas Intermediate hovered near the lowest in three years following the latest sign of a cooling Chinese economy. A strong dollar and expectations for a fifth straight weekly increase in US crude supplies also weighed on the market.

US crude for settlement in December added 0.43% to $77.52 per barrel by 13:38 GMT on the New York Mercantile Exchange. Prices ranged between $77.64 and $76.46 during the day. The contract declined by 2.02% on Tuesday to $77.19, having earlier fallen to $75.84 – the lowest since October 2011, and is down 3.8% so far this week.

Meanwhile on the ICE, Brent for settlement in the same month lost 0.43% to trade at $82.46 a barrel. The European benchmark crude slid to $81.63 earlier in the session, the weakest since October 21st 2010, after it fell 2.31% on Tuesday to $82.82. Brents premium to its US counterpart narrowed to $4.94 from yesterdays settlement at $5.63.

Oil prices remained pressured near multi-year lows ahead of government data poised to show a fifth straight weekly increase in US crude oil inventories. Stockpiles probably rose by 2.35 million barrels in the seven days through October 31st, while both gasoline and distillate fuel supplies are projected to have fallen, by 0.6 and 2.2 million barrels, respectively.

Analysts forecasts however contrasted to industry data provided by the American Petroleum Institute on Tuesday. API reported yesterday that US crude oil inventories unexpectedly dropped by 639 000 barrels last week, while gasoline stockpiles rose by 155 000 barrels and distillate fuel ones gained 240 000 barrels.

API’s statistics, however, are deemed less reliable than EIA’s figures as they are based on voluntary information provided by operators of pipelines, refineries and bulk terminals, while the government requires reports be filed with the EIA.

China slowdown fears

The market was also pressured by worse-than-expected China data, coupled with mostly downbeat figures from Europe.

Chinas services sector grew slower than anticipated in October, with the corresponding HSBC Services PMI coming in at 52.9. This defied analysts projections for a jump to 53.9 from Septembers reading of 53.5. Although this was the weakest growth pace in five months, it was still well above the level 50 expansion-contraction threshold.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, commented: “Overall, the service sector grew steadily in October as the underlying business conditions continue to look better than in the manufacturing part of the economy. While this pattern will likely continue, we still expect further easing measures in the coming months to help offset the downward pressures on the economy.”

Slower-than-expected services sector expansion in Germany, Spain and the Eurozone as a whole, coupled with downbeat retail sales from the Euro area, offset better-than-projected readings from Italy and France and fanned more negative sentiment for oil demand.

The European Commission revising down its forecast for Eurozone economic growth over the next few years also dragged on oil prices.

Saudi Arabia price cut

The market fell to new lows yesterday and extended its decline after top OPEC producer and exporter Saudi Arabia reduced the premium of Arab Light to U.S. Gulf Coast benchmarks by $0.45 per barrel to the lowest this year. Meanwhile, the kingdom increased its December sales prices, relative to benchmarks, to Asia and Europe.

Although the news were overall mixed, due to the higher price to Asia and Europe, the market’s reaction clearly reflected, and exacerbated, the overall bearish sentiment which has been dominant in the recent weeks. Some analysts saw Saudi Arabia’s move as an intention to fight for US market share by pressuring US shale producers.

OPEC’s 12 member countries will convene in Vienna on November 27th to discuss the group’s production policy. However, OPEC Secretary General Abdullah al-Badri said last week he sees little change to the group’s 2015 output target and that there is no need to panic at the recent slump in prices, reinforcing indications that member countries are in no hurry to cut output.

Also keeping market players on the edge, Saudi Arabia’s Oil Minister Ali Al-Naimi is visiting fellow exporters Venezuela and Mexico for the first time in years. Although the official purpose for the visit was not the recent price slump, rather a climate event in Caracas starting on November 6th, investors will be keeping a close eye on any developments, given the visits timing ahead of OPECs scheduled November 27 meeting.

Strong dollar

A continued strengthening of the US dollar kept applying downward pressure as well. The US dollar index rallied to fresh highs boosted by a weaker euro and yen.

Upbeat employment data from the US continued to point to a robust economic recovery, bolstering the greenbacks appeal. Automatic Data Processing reported that US employers in the non-farm private sector added 230 000 jobs in October, compared to an upward-revised 225 000 in September. Analysts had projected a drop to 220 000.

The US dollar index, which measures the greenback’s performance against a basket of six major trading peers, surged to the highest in more than four years. The December contract advanced 0.45% to 87.485 by 13:38 GMT, having earlier risen to 87.720, the highest since June 2010. The contract fell by 0.36% to 87.092 on Monday.

Investors now awaited services activity data from the US later in the day, provided separately by Markit Economics and the Institute for Supply Management, as well as the Energy Information Administrations weekly crude oil inventories report.

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate December futures’ central pivot point is at $77.15. In case the contract breaches the first resistance level at $78.45, it may rise to $79.72. Should the second key resistance be broken, the US benchmark may attempt to advance $81.02.

If the contract manages to breach the first key support $75.88, it might come to test $74.58. With this second key support broken, movement to the downside could continue to $73.31.

Meanwhile, December Brent’s central pivot point is projected at $83.11. The contract will see its first resistance level at $84.14. If breached, it may rise and test $85.46. In case the second key resistance is broken, the European crude benchmark may attempt to advance $86.49.

If Brent manages to penetrate the first key support at $81.79, it could continue down to $80.76. With the second support broken, downside movement may extend $79.44 per barrel.