Crude oil futures are being hit hard the week-ending February 9. Both U.S. West Texas Intermediate and international favorite Brent crude oil futures have trended lower all week. As of Thursday, they have posted five consecutive lower closes.
The catalysts include external factors like rising U.S. Treasury yields and stock market volatility. However, most of the selling pressure is being generated by worries over increasing output and rising global supplies. In addition to concerns about rising supplies, investors are also concerned about the stronger dollar’s impact on foreign demand for U.S. oil and lower demand due to seasonal maintenance.
As of early Friday, March WTI crude oil is testing its lowest level since January 2 and April Brent is challenging its lowest level since December 22. Both markets have wiped out all of this year’s earlier gains and are now trading lower for 2018.
One factor encouraging investors to begin shedding their long positions was the U.S. Energy Information Administration’s weekly inventories report.
According to the EIA, U.S. commercial crude inventories rose by 1.9 million barrels to 420.3 million in the week through February 2. Traders were looking for a 3 million barrel build. The increase was being blamed on a buildup of stockpiles in the Gulf Coast refining hub, where refiners are winding down operations for seasonal maintenance.
Stockpiles of gasoline and distillate fuels such as diesel also rose by 3.4 million barrels and 3.9 million barrels respectively, the EIA reported, well-above trader expectations.
In other bearish news, the EIA forecast U.S. production will average 10.6 million barrels a day this year, enough to continue surpassing output from Saudi Arabia, until recently the world’s second-biggest producer. In 2019 EIA sees American output at 11.2 million barrels, enough to rival top producer Russia.
On Thursday, sellers were influenced by the news that OPEC member Iran announced plans to increase production within the next four years by at least 700,000 barrels a day.
The Impact of Rising Interest Rates
Rising U.S. Treasury yields have been triggering violent responses in the financial markets since late last week. A rise in the U.S. 10-year Treasury Note above the 2.70 percent to 2.885 percent triggered a massive sell-off in U.S. equity markets. The increased volatility encouraged investors to shed risky assets and commodities and to seek protection in so-called safe-haven assets.
Rising rates helped drive the U.S. Dollar to nearly a one-month high. This weakened dollar-denominated commodities like crude oil. Hedge fund margin calls due to the steep drop in the stock market also encouraged money managers to sell crude oil contracts in order to raise cash.
We could see similar price action next week if interest rates continue to rise.
Weekly March West Texas Intermediate Crude Oil Technical Analysis
(Click to enlarge)
The main trend is up according to the weekly swing chart. However, momentum has shifted to the downside. A trade through $66.66 will signal a resumption of the uptrend.
The main range is $50.07 to $66.66. Its retracement zone at $58.37 to $56.41 is the primary downside target.
On the upside, the resistance is a major 50% level at $64.11. Crossing to the weak side of this level this week helped fuel the acceleration to the downside.
Based on the current price action and the downside momentum, we’re looking for the selling to continue this week with an uptrending angle at $59.07 the first target. We could see a technical bounce on the first test of this angle, but if it fails, the selling should extend into the main 50% level at $58.37.
Since the trend is up according to the swing chart, a test of $58.37 could lead to counter-trend profit-taking or some fresh buying.
If $58.37 fails as support, the selling could accelerate again with the next target the Fibonacci level at $56.41.
Basically, in order to maintain the longer-term upside bias, buyers will have to come in on test of the $58.37 to $56.41 zone. If they fail to show up and the zone fails as support then look out to the downside.
Money managers currently hold about 1 billion barrels of crude oil. If these hedge fund managers are forced to liquidate their positions, or they decide to start taking profits due a change in the fundamentals and market conditions then prices could trade back into the low $50 area over the near-term.