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December Crude Oil futures are set to finish the week over 8.00% lower if the pace of the current selling pressure continues into Friday’s close. Last week, the market was pressing its high for the week and a key 50% retracement level. This week it’s pressuring its low for the week and another short-term 50% level.
Just like last week, trader momentum will determine whether the market makes a successful test of the retracement area, or trades through it, making $51.42 a new secondary lower top.
Two factors have been supportive for crude oil recently. One is the gradual drop in the rig count as reported by driller Baker Hughes. The other is Russia’s involvement in the war in Syria. This week, however, traders are acting as if these two have become non-events.
Last week, short-sellers were being flushed out of the market because they felt that perhaps Russia could gain influence in the Middle East and convince OPEC to cut production. This week’s price action suggests that last week’s rally was simply an overreaction to the fresh news.
The week started with crude oil under pressure after OPEC’s monthly report said the group pumped 31.57 million bpd in September, up 110,000 bpd from August and almost 2 million bpd more than its demand prediction for this year.
OPEC also forecast that demand for its oil in 2016 would be much higher than previously thought as its strategy of letting prices fall hits U.S. shale supplies.
Comments from Kuwait’s Oil Minister Ali al-Omair also weighed on prices. He said there were no calls within OPEC to change the production policy and that lower output from high-cost producers could support prices in 2016. This was another sign that OPEC would continue to defend its market share.
OPEC’s monthly report seems to have driven the speculative buyers out of the market and given commodity and hedge funds renewed confidence in the short-side of the market. The price action also suggests that the monthly reports will be the guideline into the future. Any change in OPEC policy will likely show up in this report, so as long as it is going to maintain its bearish strategy, the right side of the market is likely to be the short side. It also weakens the long speculators case for a rally because of Russian influence in Syria and on OPEC’s production decisions.
The drop in the rig count was given credit for helping to boost prices, but this week’s price action suggests that short-sellers may be expecting it to taper off or nudge higher because of recent favorable prices.
At the end of last week, Baker Hughes reported that the number of active oil rigs fell by 9 to 605. This put the count at the lowest level since the week-ending July 30, 2010. However, with prices trading over $50.00 for the first time since July, some producers may have taken advantage of the rally and actually reactivated a few wells.
Additionally, the rate at which rigs have been shutting down may not be fast enough to offset the increased production from OPEC and put a reasonable dent in current supply. Because of drilling improvements, oil producers may be shutting down low-producing wells, while leaving the most efficient wells on line.
This week’s U.S. Energy Information Administration’s inventories report showed another hefty gain in crude stockpiles. Traders blamed the increase on a further slowdown in refinery activity due to seasonal maintenance. Once again it’s a case of too much supply and too little demand. Prices are likely to head lower until these two come into balance.
According to the EIA, crude stockpiles increased 7.6 million barrels for the week-ended October 9. Analysts were looking for a build of 1.8 million barrels. The American Petroleum Institute said this week that inventories jumped 9.3 million barrels. The rise in inventories was being blamed on a drop in refinery utilization to 86% of capacity from 87.5% a week earlier.
Technically, the weekly December Crude Oil chart is still bearish. Last week, it tested a 50% resistance level. This week is likely to end with the market testing a 50% support level. If the downside momentum continues then sellers are going to try to overtake the 50% level at $45.32. This could trigger a further decline into the 61.8% level at $43.88.
OPEC’s monthly report supports a bearish long-term scenario. The rig count report has the potential to underpin the market or at least slow down the rate of the price decline. However, if the rig count increases for the week-ending October 16 then look for the selling pressure to increase.
Increased refinery utilization could also provide support, but like the decreasing rig count, if it doesn’t surprise traders, the bearish news from OPEC is likely to continue to control the price action. This means limited upside action and renewed selling pressure on rallies.