Expect Back And Forth Price Action Until June 5th
By Jim Hyerczyk - May 22, 2015, 2:32 PM CDT
July Crude Oil futures have drifted sideways-to-lower since its May 6 top at $63.62 despite three consecutive weekly drawdowns in inventory. Drawdowns have even taken place four out of the last ten weeks. Furthermore, the number of producing U.S. rigs has also declined for several months although lately at a slower pace than earlier in the year.
(Click to enlarge)
Inventory drawdowns and rig reductions, on paper are bullish indicators and should have been supportive to prices. Instead, July Crude Oil futures have weakened since May 6, dropping from $63.62 to $57.93 in nine sessions. A potentially bearish closing price reversal top has also been exerting a negative influence on the market, setting up the possibility of a correction into $55.54 to $53.63.
Although U.S. producers have been making an effort to slow down production, demand has been too sluggish to put a serious dent in total inventories which are still at an 80-year high at 482.2 million barrels. On top of this, OPEC appears ready to defend its market share of the global oil market by ramping up production. This assumption came from a May 13 report by the International Energy Agency.
In the report, the IEA stated that Saudi Arabia boosted output to the highest level in at least three decades. Even with the U.S. reducing production, the increased production by OPEC, and especially Saudi Arabia, is likely lessening hopes that supply will contract enough to maintain the current rally.
This…
July Crude Oil futures have drifted sideways-to-lower since its May 6 top at $63.62 despite three consecutive weekly drawdowns in inventory. Drawdowns have even taken place four out of the last ten weeks. Furthermore, the number of producing U.S. rigs has also declined for several months although lately at a slower pace than earlier in the year.
(Click to enlarge)
Inventory drawdowns and rig reductions, on paper are bullish indicators and should have been supportive to prices. Instead, July Crude Oil futures have weakened since May 6, dropping from $63.62 to $57.93 in nine sessions. A potentially bearish closing price reversal top has also been exerting a negative influence on the market, setting up the possibility of a correction into $55.54 to $53.63.
Although U.S. producers have been making an effort to slow down production, demand has been too sluggish to put a serious dent in total inventories which are still at an 80-year high at 482.2 million barrels. On top of this, OPEC appears ready to defend its market share of the global oil market by ramping up production. This assumption came from a May 13 report by the International Energy Agency.
In the report, the IEA stated that Saudi Arabia boosted output to the highest level in at least three decades. Even with the U.S. reducing production, the increased production by OPEC, and especially Saudi Arabia, is likely lessening hopes that supply will contract enough to maintain the current rally.
This may also be what hedge and commodity fund managers are thinking since they reduced their net-long positions in WTI crude oil by 2.1 percent according to the latest U.S. Commodity Futures Trading Commission Commitment of Traders report. According to the numbers, large investors slashed long positions the most in two months. Their assessment of the current supply situation was not enough to turn them bearish, however, since short bets declined to the lowest level since August 2014.
To put it into simple terms, crude oil is vulnerable to a near-term correction until the supply situation starts to show signs of serious tightening. In the worst case scenario, the market is likely to move lower over the near-term if both U.S. and OPEC production continues to increase.
The details of the IEA report also revealed that OPEC was producing nearly 160,000 additional barrels a day in April pushing total daily production to 31.21 million. This was the highest production level since September 2012. Additionally, global crude oil supply was an impressive 3.2 million barrels a day higher in April than a year earlier.
At the same time OPEC was raising production, U.S. producers were shutting down rigs. U.S. drillers may have made a historically large rig cut over a 20-week period, however, the pace of the reductions has been slowing. Even with the rig reduction, U.S. production has remained relatively strong due to improvements in efficiency.
(Click to enlarge)
The current price action suggests a developing downside bias, but the absence of a catalyst to drive this market sharply lower has helped generate periodic short-covering rallies over the past two weeks. Helping to prop the market up at times have been reports of fighting in Iraq and Yemen. Although the fighting has not directly affected supply, weak short-sellers have been forced to cover their positions.
This back and forth price action is likely to continue into at least June 5 when OPEC holds its meeting. At that time, OPEC is likely to confirm that it will maintain current production levels. This news should trigger another break in prices. Adding to the potential price slide is the possibility that U.S. producers will ramp up shale production.
The chart pattern suggests the market may be setting up for a corrective move to at least $55.54 over the near-term. The high level of OPEC production and the current U.S. rig count should be enough to put a lid on any rallies. Increased OPEC production along with diminishing rig count reductions could be the news that triggers the next wave of selling. If traders continue to hold the market in a range then look for increased selling pressure to begin at or around June 5 in conjunction with the OPEC meeting.
