Crude oil trading outlook: futures extend 5% drop as US inventories seen rising

West Texas Intermediate and Brent crude hit new multi-year lows after falling by more than 5% on Monday as speculations about a jump in US oil inventories last week exacerbated a global supply glut that has slashed the crude benchmarks by half since June. A strong dollar and lackluster manufacturing growth in major consumers further dragged on the market, but support was provided as Saudi Arabia raised delivery prices to Asian buyers.

WTI futures for settlement in February traded 1.12% lower at $49.48 per barrel at 8:18 GMT, having earlier fallen to $49.32, the lowest since April 2009. Prices settled 5% lower on Monday at $50.04.

Meanwhile on the ICE, Brent for delivery in the same month was down 1.51% on the day at $52.31 per barrel. Prices plunged to $52.28 earlier in the session, the weakest since early-May 2009. The European benchmark crude fell 5.87% yesterday to $53.11, the lowest close since May 1st, 2009. Brent traded at a premium of $2.83 to its US counterpart, down from yesterdays settlement at $3.07.

Oil prices have more than halved since a June peak as prospects of slowing global economic growth fueled speculations for lower demand that would fail to soak rising supplies as the world’s leading producers pump at the highest rate in decades. The price slump was further exacerbated as the Organization of the Petroleum Exporting Countries, led by Saudi Arabia, entered a stance to defend market share and reached a collective decision on November 27th to maintain the group’s current production pace.

Adding to the supply-demand imbalance, government data showed that Russias oil output jumped 0.3% to 10.667 million barrels per day in December, a post-Soviet record, while Iraq, OPEC’s second-biggest producer, shipped 2.94 million bpd last month, the most in three decades, Oil Ministry spokesman Asim Jihad said. Moreover, Iraq plans to further boost exports in January to 3.3 million barrels per day after it reached an accord with its semi-autonomous Kurdish region in December over oil exports through Turkey.

The US pumped 9.14 million barrels per day in the week ended December 12th, the highest on weekly data dating back to January 1983, and output has remained near that level ever since. Inventory data this week is expected to show that US crude oil inventories probably jumped by 750 000 barrels to 386.2 million in the week ended January 2nd, while both major refined product categories probably increased as well. Motor gasoline stockpiles likely surged by 4.5 million barrels and distillate fuel supplies, which include diesel and heating oil, rose by 2.13 million.

Strong dollar

The euro plunged to the lowest in nine years against the dollar amid speculations that the European Central Bank has moved closer to large-scale sovereign bond purchases, sending the dollar to multi-year highs against a basket of six major counterparts.

The US dollar index for settlement in March traded 0.04% higher at 91.655 at 8:18 GMT, having shifted in a daily range of 91.680-91.415. The US currency gauge rose by 0.26% yesterday to 91.622, having earlier touched 92.050.

Fears of another Greek drama within the Eurozone further pressured the euro and curbed risk appetite. Greek Prime Minister Antonis Samaras said that a victory for the main opposition party Syriza at the upcoming snap election would cause default and Greece’s exit from the euro area.

Syriza leader Alexis Tsipras said his party would end German-led austerity, vowing to restructure his nation’s debt. “Greece will write down on most of the nominal value of debt, so that it becomes sustainable,” Tsipras said.

Meanwhile in the US, the Federal Reserve has indicated that an interest rate hike is likely to begin this year, provided key economic figures meet expectations. Investors will be scouring through tomorrows Fed minutes for clues of when the central bank might move to raise borrowing costs.

Analysts have voiced concerns that the slump in oil prices might impede Feds efforts to bring inflation to the targeted 2%, while exacerbating deflationary fears in the Eurozone. However, Fed officials said after their last policy meeting that falling oil prices would pose little fear to inflation in the US.

Saudi prices

Providing some much needed support, albeit to a minor extent, Saudi Arabia raised prices for shipping all of its crudes to Asia in February. Its main Arab Light grade will be delivered at a discount of $1.40 per barrel compared to a regional average, up from a discount of $2 in January, which was the biggest in at least 14 years.

Leo Drollas, a London-based independent consultant, said for Bloomberg: “They’re putting the brakes on a little bit. It’s a little message that maybe prices are going down too far too quickly, and this is a little signal that they’re looking at things.”

However, the state-owned producer Saudi Aramco also cut prices for all of its crudes for Europe and most in the US.

According to a Morgan Stanley report, global supply may be boosted by rising production from Russian and Iraq, as well as from fields in the US, Latin America, Canada and West Africa. Iran may flood the market with an additional 500 000 barrels in case the Islamic Republic reaches a final agreement with world powers to curb its nuclear program in return of lifting tough economic sanctions.

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate February futures’ central pivot point is at $50.82. In case the contract breaches the first resistance level at $51.95, it may rise to $53.87. Should the second key resistance be broken, the US benchmark may attempt to advance $55.00.

If the contract manages to breach the first key support at $48.90, it might come to test $47.77. With this second support broken, movement to the downside could continue to $45.85.

Meanwhile, February Brent’s central pivot point is projected at $54.02. The contract will see its first resistance level at $55.39. If breached, it may rise and test $57.66. In case the second key resistance is broken, the European crude benchmark may attempt to advance $59.03.

If Brent manages to penetrate the S1 level at $51.75, it could continue down to test $50.38. With the second support broken, downside movement may extend to $48.11 per barrel.