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 Wednesday 02 August 2017

Crude breaks above resistance - PM Bulletin



This time last week the front-month WTI crude oil contract smashed above resistance around $47. This marked the 50% retracement of the May-June sell-off which followed the last OPEC meeting. Last week’s surge followed on from US inventory updates from the American Petroleum Institute (API) and the Energy Information Administration (EIA). Both recorded larger than forecast drawdowns in stockpiles of crude oil and gasoline.

Last week we also highlighted the significance of the $48.50 area. This marks the 50% retracement of the sell-off from the significant high hit back in February this year to the June low. This area also overlaps with the upper end of a trend line which marks a line of resistance in a downward-sloping channel that began forming in March. We suggested that if WTI could break and consolidate above $48.20/$48.50 then further gains were possible. This was not just from a technical perspective but from a fundamental outlook as well. At the beginning of last week ministers from six key oil producers met in Russia. Saudi Arabia promised to cut its exports by 1 million barrels per day (bpd)and ministers pledged to extend the current 1.8 million bpd production cut beyond March 2018 if necessary. Nigeria also agreed to cap output at 1.8 million bpd - just 100,000 shy of current levels. Since then WTI has made further gains and at the beginning of this week it broke and closed above the psychologically significant $50 per barrel level.

But yesterday WTI slumped back below $50 following reports that OPEC output in July rose by 210,000 barrels to 32.87 million barrels per day (bpd). Libya was the problem as it added 180,000 bpd in the month to take production up to 1.02 million bpd. Libya and Nigeria are the two OPEC members currently exempt from the agreed output cuts. Crude came under further downside pressure after the API released its latest US inventory update after last night’s close. This showed a 1.8 million barrel build in crude stockpiles and a large increase in inventories at the Cushing, Oklahoma hub. This followed four consecutive weeks of bigger-than-expected drawdowns. Analysts had expected drawdowns in both categories last night.

Earlier this afternoon the latest inventory update from the EIA proved to be another disappointment for the bulls. Crude inventories fell, but by less than expected. But total US oil product inventories rose by 1.1 million barrels last week, bringing to an end the four-week run of back-to-back inventory draws.

As we can see from the chart below, yesterday’s sell-off was sharp and unexpected, typical of the behaviour one sees when a market is a touch overbought. It only takes a bit of negative news to trigger a wave of selling. But so far the old line of resistance (now support) has not been broken. If this continues to hold for the rest of this week then the oil market has scope for further gains. On the flip side, if the selling pressure builds from here, leading to a significant break and close below $48.00/48.50 then a retest of the June lows can’t be ruled out either. 


Chart courtesy of


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Posted by David Morrison

Category: PM Bulletin

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