Crude Futures Holding Firm On Supply Drawdowns

Crude Oil Outlook

June Crude Oil futures remained firm last week as the market flirted with the psychological $60.00 price level. The market was supported by supply news out of Cushing, Oklahoma, global demand news from the Saudis and a positive technical chart pattern.

This week's U.S. Energy Information Administration report showed a much needed drawdown at Cushing, Oklahoma. This marked the first decline in inventories since November and it alleviated some of the fear that the U.S. was running out of storage space.

According to the EIA data, stockpiles at Cushing, the delivery hub for NYMEX crude oil, slipped 514,000 barrels to 61.7 million last week. This could be a sign that supply is finally leveling off and it relieves some of the worries that the key delivery point was close to reaching maximum capacity.

Bullish investors were relieved by the news out of Cushing because reaching full capacity would have been an extremely bearish event. The news caused some light short-covering and encouraged further speculative buying.

As of April 17, Cushing supplies were sitting on a record 62.2 million barrels. This was close to the hub's working capacity of 70.8 million. The decline in inventory was also the first in 20 weeks. Just like the reduction of drilling rigs became the key market driver for several weeks, traders are now going to turn their focus on the further reduction of supply at Cushing each week. It may take 3 or 4 weeks of consecutive drawdown for traders to call it a trend. However, each week of decline should underpin the market, pushing prices higher in the process.

Earlier in the week, comments from Saudi Arabia helped stem a slide in prices. Prince Abdulaziz Bin Abdulaziz helped establish support for crude oil when he said, "As the minister mentioned, the kingdom responds to demand and supplies oil to wherever the demand is and whoever asks for it."

The Prince was referring to last week's comments from Saudi Oil Minister Ali al-Naimi who said that the kingdom was producing near-record levels of crude oil in April at around 10 million barrels per day. Most of the new demand was coming from Asia.

In a speech in Beijing, al-Naimi said, "Asian demand for oil remains strong and we are ready to supply whatever is required. As the Asian population grows, and as the middle class expands, so the demand for energy will increase."

He further added that "Oil will retain its pre-eminent position and Saudi Arabia will remain the number one supplier. We should not lose sight of these facts and the importance of our ongoing relationship."

Technically, the chart pattern remained bullish after changing the main trend to up on the weekly chart the previous week. Although there was no spike in prices, as often occurs when a previous top is broken, buyers were able to successfully defend the old top at $57.27. This is a sign that buyers are willing to buy strength at current price levels and that the change in trend was not only caused by stop loss orders.

Traders seem to be following the old adage that "old tops tend to become new bottoms". If this is true then the key support this week should be $57.27. A sustained move under this level will mean that buyers want to see a pullback into a value zone before prices move higher. Maintaining this level as support will likely indicate that investors are looking for higher prices. According to the current chart pattern, the primary upside target remains a major 50% level at $69.62.

Energy Equities Outlook

The S&P Select Energy ETF (XLE) continued to grind higher last week, reflecting growing optimism about higher crude oil prices. This chart shows a well-established support base and developing uptrend. Upside momentum could continue to increase along with the rise in oil prices.

Like the crude oil market, investors are either going to play for a pullback into a value area or create enough upside momentum with aggressive buying to drive the market into the first target price at $86.41. 

British Petroleum (BP) stock remained firm last week despite a reported drop in profits of 26 percent. The company said that net profit for the first quarter was $2.66 billion, down from $3.34 billion a year ago. It also said it was able to realize about $54 a barrel for Brent crude oil during an especially bearish time period for oil prices.

During the oil price slide, BP was able to earn more from its downstream businesses - the refining of petroleum products - to offset losses in oil exploration and other activities related to getting energy out of the ground.

Investors realizing that this report was based on stale data, continued to support the stock. Expectations of further improvement in oil prices should continue to support higher prices, but the market may run into selling pressure at the first target price of $44.18. A sustained move over this level could trigger a rally into the next target at $46.37.

A spike in oil prices is likely to fuel a similar move in BP stock. Investors are likely to take profits on the first test of $44.18 and if oil prices start to decline.