Negative Sentiment Drives Oil Lower

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures prices were hit on all fronts this week with the markets in a position to finish the week sharply lower. Especially significant is the evaporation of the risk premium in crude oil prices placed by traders last week following the attacks on Saudi Arabian oil facilities.

A combination of bearish supply and demand news helped fill in the price gap left by the strong jump in prices last week, which indicates dampened concerns over an escalation of tensions in the Middle East and increased worries about demand. Essentially, the price action suggests traders are thinking, “If demand is weak, it doesn’t really matter if supply is reduced.”

A number of factors pressured prices throughout the week including U.S.-China trade relations, Saudi facility repairs, rising U.S. supply and U.S-Iran sanctions.

Traders Worried About Trade Deal

Early in the week, crude oil prices were supported by optimism over improving U.S.-China trade relations with both sides making gestures the past two weeks to ease tensions. Prices tumbled, however, after President Trump said he would not accept a “bad deal” with China. This raised concerns that the two sides were still far apart, reducing the chances of a trade deal at their October 10-11 high-level trade talks.

EIA Reports Large Inventories Build, Rising Production

Prices were further pressured on Wednesday after the EIA reported a 2.4-million barrel build in crude oil inventories for the week-ending September 20. Analysts were looking for a draw of 300,000 to 800,000 barrels.

The EIA also reported a 500,000-barrel increase in gasoline stockpiles for the week to September 20, as well as a 3-million barrel draw in distillate fuel inventories. The decline in distillate fuel inventories was not enough to offset the effect from the crude oil and gasoline inventory builds.

In production, the EIA reported an average daily rate of 10.2 million barrels for gasoline and 5 million barrels for distillate fuels. This compares with 9.5 million bpd of gasoline and 5.1 million bpd of distillate fuels a week earlier.

Saudi Oil Capacity Recovers Faster Than Expected

Also on Wednesday, Bloomberg reported that Saudi Arabia is recovering faster than expected from the attacks ever on its oil industry, beating its own target for restoring capacity by about a week.

State oil producer Saudi Aramco also boosted total production capacity to more than 11 million barrels a day, according to people with knowledge of the situation.

There is some hope for speculative bulls, however. Despite Aramco’s efforts to assure the market, speculation persists that it will take months to repair the extensive damage caused by the attacks. Aramco isn’t likely to fully restore the 5.7 million barrels a day of lost output until the end of November.

Iran Claims US Offered to Lift Sanctions

Following a steady to lower opening on Friday, crude oil plunged after Iranian President Hassan Rouhani claimed the U.S. offered to remove all sanctions on Iran in exchange for negotiations. The State Department later denied those claims, causing oil to rebound slightly from the intraday low.

“The German chancellor, the prime minister of England (Britain) and the president of France were in New York and all insisted that this meeting take place. And America says that it will lift the sanctions,” Rouhani said on his official website, according to Reuters. “It was up for debate what sanctions will be lifted and they had said clearly that we lift all sanctions.”

“But this action wasn’t in a manner that was acceptable, meaning that in the atmosphere of sanctions and the existence of sanctions and the toxic atmosphere of maximum pressure, even if we want to negotiate with the Americans in the 5+1 framework, no one can predict what the end and result of this negotiation will be,” Rouhani added.

The State Department called the report “baseless,” adding that the U.S. is committed to zero exports from Iranian regime, Bloomberg News said.

Additional Supply/Demand Worries

On the supply side, easing tensions between Saudi and Yemen could lead to increased supply since it lowers the chances of an escalation of further attacks on Saudi oil fields. The Wall Street Journal reported, citing unnamed sources that Saudi Arabia had agreed to a partial ceasefire in Yemen.

Demand worries also intensified after the IEA said it might cut its estimates for global oil demand.

“If the global economy weakens, for which there are already some signs, we may lower oil demand expectations,” IEA Executive Director Faith Birol told Reuters.

Overview

With supply recovering and demand growth concerns increasing, momentum is clearly to the downside. We’re getting close to the same bearish state the market was in just before the attacks on Saudi Arabia. However, conditions could turn bullish quickly if there are any delays in the repairs of Saudi oil facilities since the market has very low spare capacity at this time.

Technical Analysis

Weekly November West Texas Intermediate Crude Oil Technical Analysis

Swing Chart Technical Analysis

The main trend is up according to the weekly swing, however, this week’s sell-off has driven prices back inside the range it has been trading inside for nearly half the year. Although this doesn’t affect the trend, it does change the momentum generated by last week’s price surge. With this week’s steep break, momentum has returned to neutral to bearish.

A trade through $63.89 will signal a resumption of the uptrend, while a move through $50.48 will change the main trend to down.

The main range is $73.52 to $45.05. Its 50% to 61.8% retracement zone at $59.29 to $62.64 is resistance.

The intermediate range is $45.05 to $65.23. Its retracement zone at $55.14 to $52.76 is potential support. On Friday, the market rebounded from a test of $54.75 which fell inside the zone.

The short-term range is $50.48 to $63.89. Its 50% level at $57.19 should act as a pivot, while controlling the weekly momentum. Trading below this level is indicating slightly downward momentum.

Weekly Forecast

Based on this week’s price action, the direction of the November WTI crude oil market next week is likely to be determined by trader reaction to the pivot at $57.19.

Bearish Scenario

A sustained move under $57.19 will indicate the presence of sellers. If this creates enough downside momentum then look for another test of $55.14. This is a potential trigger point for an acceleration into $52.76. Taking out this level will put the market in a position to challenge the main bottom at $50.48.

Bullish Scenario

A sustained move over $57.19 will signal the return of buyers. The first target is $59.29. Taking out this level could trigger an acceleration to the upside.

Conclusion

We’re still in a news driven market and vulnerable to wicked two-sided price swings. If conditions continue to improve between the United States and China then the market may find support. Furthermore, increased tensions between the U.S. and Iran will be supportive. Additionally, any new issues with the Saudi facility repairs could be bullish.

On the downside, a failure to reach a trade deal, faster than expected repairs and an easing of tensions in the Middle East are all bearish factors.