May Crude Oil futures broke sharply on Wednesday after the release of a bearish U.S. inventories report. The market was already under pressure ahead of the Energy Information Administration’s weekly report because of Tuesday’s weaker-than-expected American Petroleum Institute report and the stronger U.S. Dollar.
Both inventory reports reignited concerns about supply exceeding demand. With net supply still growing, many traders are starting to believe that the current nine week rally is unsustainable.
The American Petroleum Institute (API), an industry group, said in a report after Tuesday’s oil market settlement that U.S. crude stockpiles rose 8.8 million barrels last week to reach a record high of 531.8 million.
The stockpile growth reported by the API was 5.7 million higher than estimates from analysts polled by Reuters.
According to the U.S. Energy Information administration, U.S. crude stocks rose by 9.4 million barrels the week-ended March 18 to a record total of 532.5 million barrels. Traders were looking for an increase of only 2.5 million barrels.
Offsetting the crude oil build was a 4.6 million barrel decline in gasoline inventories. Weekly production ticked down by about 30,000 barrels per day, the EIA said.
The bearish report from the EIA could be the tipping point for crude oil futures as investors are getting anxious to book profits after the recent large run-up. Crude oil prices are up more than 50% over the past six weeks despite marginal improvements in supply/demand. Much of the rally has been driven by plans engineered by OPEC and other Non-OPEC members to freeze output at January levels.
Traders are also expressing concerns about the planned production freeze meeting planned for April 17. Qatar, which has been organizing the meeting, has invited all 13 OPEC members and major outside producers. The talks are expected to widen February’s initial output freeze deal by Qatar, Venezuela and Saudi Arabia, plus non-OPEC Russia.
The initiative has supported a rally in oil prices, which were about $41 a barrel on Wednesday, up from a 12-year low near $27 in January, despite doubts over whether the deal is enough to tackle excess supply in the market.
Iran has yet to say whether it will attend the meeting. But Iranian officials have made it clear that Tehran will not freeze output as it wants to raise exports following the lifting of Western sanctions in January.
Libya announced on Tuesday that it does not plan to attend the meeting. This has bullish investors worried because it would limit the impact of any freeze by producers from OPEC and other major producers.
Even when prices are trending higher and near extreme highs, OPEC has had a history of trouble getting all of its members to cooperate. With prices near 12-year lows and cash flow being a major concern, it is possible that the agreement to meet in Qatar may fall apart before it even takes place.
Since traders have largely ignored the basic fundamentals and instead have focused on a production freeze that may not even take place, a cancellation of the meeting will likely lead to ferocious selling pressure. It will be as if traders just woke up and found 532.5 million barrels. The selling could be fast and furious.
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Technically, the main trend is down according to the weekly swing chart. The main range is $51.63 to $29.85. Its retracement zone at $40.74 to $43.31 was the primary upside target. The current working high is $42.49.
If a short-term range forms between $29.85 and $42.49 then the new primary downside target will be its retracement zone at $36.17 to $34.68.
In addition to the retracement zone at $40.74 to $43.31, the market also found resistance on a downtrending angle from the $51.63 main top, moving at a pace of $.50 per week. This angle drops down to $40.53 the week-ending April 1.
Look for a bearish tone as long as the market remains below the angle at $40.53. A sustained break under this angle will also mean crude is trading on the weak side of the 50% level at $40.74. This will also be a sign that the selling pressure is getting stronger.
The first downside objective is the steep uptrending angle at $39.85. This angle has given the market upward guidance since the bottom at $29.85, or nine weeks.
Although there may be a technical bounce on the first test of $39.85, traders should watch this angle closely because this price is also the trigger point for a steep break to the downside.
Taking out $39.85 with conviction could trigger an acceleration into at least $36.17.
In summary, the basic crude oil supply/demand picture is bearish. With about three weeks to go before the production freeze meeting in Qatar, there remains some doubt that the meeting will actually take place. All of these factors could lead to renewed selling pressure that could drive the market sharply lower over the near-term.
Technically, a sustained move under $40.74 then $39.85 will be signs that the selling is getting stronger. The current chart pattern indicates that $36.17 is a reasonable downside target over the near-term.