Oil Markets Face Bearish Blowback

U.S. West Texas Intermediate crude oil is under pressure on Friday and in a position to close lower for a second consecutive week on growing demand worries and an unexpected rise in U.S. stockpiles that raised new concerns about oversupply. The U.S. benchmark is on track to lose about 6% this week.

The market has been under pressure all week starting with Saudi Arabia’s surprise move to cut prices on oil it supplies to Asia by $1.00 starting in October. A second wave of selling pressure is being fueled by a surprise rise in U.S. stockpiles as the coronavirus pandemic continues to erode demand for fuels.

Compounding the weakness was a second consecutive weekly decline in U.S. stock indexes as well as U.S. economic indicators that suggested a long and difficult recovery from the coronavirus pandemic.

Additionally, further dampening the markets mood, the U.S. Senate killed a Republican bill that would have provided around $300 billion in new coronavirus aid. In another bearish sign, traders were starting to book tankers again to store crude oil and diesel, amid a stalled economic recovery at the COVID-19 pandemic continues.

Saudi’s Cut Prices to Asia

The world’s top oil exporter Saudi Arabia cut the October official selling price for Arab Light crude it sells to Asia by the biggest margin since May. Asia is Saudi Arabia’s largest market by region.

The price cut, scheduled for October shipments, is likely a sign that the world’s biggest exporter may see fuel demand wavering amid flare-ups in the coronavirus.

Aramco is reducing pricing to Asia for October shipments of the Light grade by $1.40 a barrel, to 50 cents below the regional benchmark. The company was expected to pare pricing by $1 a barrel, to a 10-cent discount, according a Bloomberg survey of eight traders and refiners.

Saudi Arabia usually sets the tone for pricing decisions by other Middle Eastern suppliers, including Iraq and the United Arab Emirates, the second- and third-largest producers in the Organization of Petroleum Exporting Countries.

US Energy Information Administration Weekly Inventories Report

Crude oil is under pressure after U.S. government data revealed a weekly rise in U.S. crude inventories, on the heels of six consecutive weeks of declines, raising expectations of an oversupplied market as uncertainty continues to surround the outlook for demand.

The Energy Information Administration (EIA) reported that U.S. crude inventories rose by 2 million barrels for the week-ended September 4 – the first weekly increase in seven weeks. Traders were looking for a 3.1 million barrel decline.

Total U.S. crude inventories, excluding those in the Strategic Petroleum Reserve stood at 500.4 million barrels, about 14% above the five-year average for this time of year.

The EIA also reported a big drop of 1.1 million barrels per day in crude refinery runs for last week, leading to the first domestic crude-stock build in weeks. This was the result of refinery damage from Hurricane Laura.

Gasoline supply, meanwhile, fell by 3 million barrels, while distillate stockpiles declined by 1.7 million barrels. An S&P Global Platts survey had shown expectations for a supply decline of 2.5 million barrels for gasoline, but distillates were expected to rise by 300,000 barrels.

Additionally, the EIA data also showed crude stocks at the Cushing, Oklahoma, storage hub edged up by about 1.9 million barrels for the week, while total domestic oil production climbed by 300,000 barrels to 10 million barrels per day.

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis

The main trend is down according to the weekly swing chart. A trade through $44.33 will change the main trend to up. A move through $25.31 will reaffirm the downtrend. This is highly unlikely, but there is room for a normal 50% to 61.8% correction.

The main range is $59.51 to $25.31. Its 50% to 61.80% retracement zone at $42.41 to $46.45 is the major resistance. This zone stopped the rally at $44.33 during the week-ending August 28.  

The minor trend is down. It changed to down this week when sellers took out the minor bottom at $39.63. This move shifted momentum to the downside after an 18 week rally.

The short-term range is $25.31 to $44.33. Its retracement zone at $34.82 to $32.58 is the primary downside target.

Weekly Technical Forecast

This week’s downside momentum is expected to continue over the near-term with $34.82 to $32.58 the primary downside target.

In our opinion, this zone represents value so we expect aggressive countertrend buyers to come in on a test of this area. They will be attempting to produce a potentially bullish secondary higher bottom.

Any short-covering rallies are expected to draw the attention of new short-sellers. The first potential resistance is $40.90, followed by $42.41.

Weekly Outlook

Unless there is a wave of short-covering or profit-taking ahead of the weekend, sellers should continue to dominate the trade next week. Earlier in the week, it was demand worries driving the market lower, after the release of the EIA data, we can now add oversupply concerns to the growing list of bearish factors weighing on prices.  

The Saudis had previously supported the rally by raising pricing each month from June to August. However, demand from refineries has softened due to weak profits from turning crude into gasoline and other fuels. Even as economies began to recover, swollen stockpiles – rather than supplies of fresh crude – absorbed much of the increase in demand.

One way to generate demand is to lower prices. Let’s see if it works. If it doesn’t, then OPEC and its allies may have to revisit the idea of gradually reducing production into the end of the year.

With the U.S. summer driving season coming to a close, Washington policymakers failing to pass stimulus legislation and COVID-19 cases still rising, it’s hard to tell where the demand will come from to turn the markets around unless prices hit a major value area.

We expect to see buyers resurface on a test of $34.82 to $32.58. This price range represents the best near-term value area.