Last week, the U.S. Energy Information Administration (EIA) weekly petroleum status report delivered more bad news to the crude oil market, but the EiA’s long-term outlook most likely set the tone for a bearish market into the end of the year.
The weekly report showed U.S. commercial crude inventories increased by 1.4 million barrels in the week-ended August 8. This came as a surprise to traders who had priced in a 0.8 million barrel decline. Total U.S. commercial crude inventory rose to 367 million barrels, putting it above the upper limit of the five-year range for this time of the year.
Total gasoline inventories which helped give crude oil a slight boost last week, declined by 1.2 million barrels the week-ended August 8. This didn’t help gasoline or crude oil prices this week because Total Motor Gasoline supplied which represents the EIA’s measure of consumption, averaged more than 9 million barrels a day in the past four weeks. This was a drop of about 1.3% compared with the same period a year ago.
The previous week’s gasoline consumption data was friendly because it indicated greater consumer demand, but this week’s data shows that a trend did not form, setting up the market for further downside pressure. Coupled with the shutdown of some refineries for maintenance, this should’ve created a bullish gasoline/bearish crude oil scenario which doesn’t seem to be forming.
Slackening demand for gasoline may mean refineries will have to cut back production further. This action will continue to pressure crude oil prices. With the summer driving season rapidly coming to an end, it doesn’t look like there is going to be a late season surge in gasoline demand. Therefore, we have to conclude that both support for gasoline and crude oil will continue to weaken.
This assessment is supported by the EIA which announced this week that it expects retail gasoline prices to continue to fall. According to the latest data, retail gasoline prices may decline to an average of $3.30 a gallon in December.
With demand dropping for gasoline, crude oil prices are expected to continue to weaken. Additional downside pressure is being supplied by the steady increase in U.S. Total Crude Oil Production which is currently averaging 8.5 million barrels per day. The recent figures show that in July, the level of production was at its highest level since April 1987.
Recent geopolitical events in Libya, Iraq and Ukraine have had almost no effect on WTI crude oil prices. At times, Brent Crude Oil futures have reacted to the news, but without any immediate threat to supply, these surges have been limited. The timing of a supply disruption cannot be predicted, so just taking the supply/demand inventory report into consideration, it looks as if the downtrend is expected to continue in both gasoline and crude oil.
Technically, the Monthly Nearby Crude Oil chart offers the best outlook for the market. This chart shows that crude oil has dropped decisively to the weakside of its major 50% price level at $98.88. This price is expected to act like a pivot. As long as prices remain below this level, look for further downside pressure.
The short-term range is $87.26 to $106.32. Its retracement zone at $96.79 to $94.54 is currently being tested. This zone along with an uptrending line at $94.26 may help produce a few technical bounces on the daily chart as investors take profits on the way down, however, these short-term “pops” in the market are not likely to mean anything unless the market crosses back over $98.88.
The key area to watch the rest of the month is $94.54 to $94.26. If $94.26 is taken out with conviction then look for an acceleration to the downside with the next potential downside target at $90.76.
At this time, it doesn’t look like the summer driver is going to save gasoline and crude oil from further price erosion. Refinery shutdowns may help slow down the rate of the descent, but not enough to turn either market higher over the near-term. The fundamentals and the technical chart pattern support a bearish scenario.