Here’s Why Oil Prices Are Falling Back

U.S. West Texas Intermediate crude oil futures are trading nearly flat on Friday, edging lower shortly after the New York opening as investors attempt to close out a choppy week with a marginal gain.

After surging into a multi-month high at the start of the week on stronger demand expectations, the market is struggling with traders booking profits and moving to the sidelines as higher U.S. crude oil inventories and a strong U.S. Dollar offset recent forecasts calling for supply deficits.

Last week’s rise in U.S. inventories came as production in the Gulf returned close to levels reached before Hurricane Ida struck about a month ago.

Meanwhile, a power crisis and housing market concerns in China, the world’s biggest crude importer and its second-largest consumer behind the United States, is pressuring sentiment and weighing on oil demand. However, late in the week, the market reversed course on reports China was prepared to buy more oil and other energy supplies to help sustain its economic recovery.

Gains Being Capped by Unexpected Rise in US Crude Inventories

The API on Tuesday reported a surprise build in crude oil inventories of 4.127 million barrels for the week ending September 24. Analyst expectations were for a loss of 2.333 million barrels for the week.

The API also reported a build in gasoline inventories of 3.555 million barrels for the same week. Distillate stocks saw an increase in inventories this week of 2.483 million barrels for the week.

On Wednesday, the U.S. Energy Information Administration (EIA) reported U.S. crude oil, gasoline, and distillate inventories rose last week as the production rebounded from recent storms.

Crude oil inventories rose by 4.6 million barrels in the week to September 24 to 418.5 million barrels, EIA data showed, compared with analysts’ expectations in a Reuters poll for a 1.7 million-barrel drop.

U.S. gasoline stocks posted a modest gain of 193,000 barrels to 221.8 million barrels, compared with expectations for a 1.4 million-barrel rise.

Distillate stockpiles, which include diesel and heating oil, rose by 385,000 barrels in the week to 129.7 million barrels, versus expectations for a 1.6 million-barrel drop.

US Dollar Volatility May Have Fueled Crude’s Two-Sided Trade

A two-sided swing in the U.S. Dollar may have encouraged crude oil shorts to book profits after trading weaker most of the week.

Crude oil edged lower throughout the week as the U.S. Dollar tested its highest level in a year. It posted a dramatic intraday reversal later in the day, however, after the greenback turned lower due to a rise in U.S. Weekly Jobless Claims. Since crude oil is a dollar-denominated commodity, it tends to react to volatility in the U.S. Dollar. A weaker dollar, for example, tends to lead to increased foreign demand for crude.

Chinese Official Hints at Increased Demand

China Premier Li Keqiang said the world’s biggest crude importer and No. 2 consumer will ensure its energy, power supply and will keep economic operations within a reasonable range.

Traders interpreted this to mean they would be willing to pay anything for enough crude and products to sustain its economic recovery.

Li Keqiang probably made the comment because China has been experiencing a power crisis and housing market problems that have been weighing on demand. Additionally, China’s factory activity unexpectedly shrank in September due to wider curbs on electricity use and elevated input prices.

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart. The uptrend was reaffirmed this week when buyers took out the previous high at $73.86. A trade through $61.11 will change the main trend to down. Taking out the main top at $76.98 will reaffirm the uptrend.

Retracement Level Analysis

The minor range is $61.11 to $76.26. The market is currently trading on the strong side of its retracement zone at $68.69 to $66.90.

The short-term range is $55.54 to $76.26. Its retracement zone at $65.00 to $63.46 is the best support area. This zone is controlling the near-term direction of the market.  

The main range is $37.70 to $76.26. If the main trend changes to down then its retracement zone at $56.98 to $52.43 will become the primary downside target and value area.

Weekly Technical Forecast

The direction of the December WTI crude oil market the week-ending October 8 will be determined by trader reaction to $73.61.

Bullish Scenario

A sustained move over $73.61 will indicate the presence of buyers. This could create the upside momentum needed to challenge the main top at $76.98, followed by the psychological $80.00 level.

Bearish Scenario

A sustained move under $73.61 will signal the presence of sellers. If this move generates enough downside momentum then look for the selling to possibly extend into the major support area at $66.90 to $65.00. This is a value area so look for buyers on a test of this zone.

Short-Term Outlook

With US supply rising, crude oil traders are worried about where the demand will come from to offset these gains. Although some analysts still believe there will be a global oil shortage as long as OPEC+ keeps a lid on production and the number of COVID-19 cases decline as vaccinations increase. Citigroup is forecasting oil balances to be in a 1.5 million barrel per day deficit on average over the next six months, even with continued supply increases.

The near-term wildcard is whether OPEC and its allies decide to increase production at its October meeting.

Those who support a production increase believe that rapidly rising crude oil prices could lead to demand destruction.

Despite this week’s choppy trade, we’re maintaining our bullish outlook because of expectations of a continued supply deficit. Our near-term concerns are rapidly rising prices creating demand destruction and a surprise increase in OPEC+ production.

Technically, with WTI crude oil trading so close to resistance, traders will have to decide whether to chase the market higher or play for a pullback into a support area. Without a surprise development, traders will probably be reluctant to buy strength or a breakout. This makes playing for a pullback into support the less-risky trade this week.