Crude slid as much as 4.5% to US$44.84 a barrel (WTI) in New York on Friday, for the fourth weekly drop in a row. The EIA report of oil in storage in the US showed inventory expanded for a ninth straight week. Critically, the sell down shows a confirmation of the break downwards from the bearish wedge pattern that has formed since the end of January. The end of January low of around US$43.5 is now the next key support.

Supply woes

Most of the recent influences for oil price have undoubtedly been caused by supply-side news. Weekly noise over inventory and US ‘rig counts’, for instance, have led to the volatility of these past months, making it almost impossible to trade this commodity successfully without inside information on the next release. Looking back at what triggered this slide in crude prices, one needs to zoom out back to OPEC’s announcement in November 2014. At that point, much to the dismay of oil bulls, OPEC decided to keep production levels on hold. This caused WTI to plunge from around US$75 to the mid 40s per barrel in slightly over a month! The unspoken message from OPEC was that they were ready to fight the US crude producers - with their seemingly endless supply - by allowing prices to fall, in turn hoping to weed out some US shale producers faced with higher break-even production prices. Back to today, despite the nerves over every report of an inventory increase, one should not ignore the fact that OPEC’s intended action is bearing fruit. Every report of an increase in US inventory has equally been alternated with a report of a shut down in sources of US supply. In fact, from November to last week, total operating rigs in the US have fallen by as much as 40%. The question then remains as to how much lead time it will take before we see any effects of the retired rigs and wells on slowing the inventory build rate.

Demand pickup?

Meanwhile, through this period, demand-side news has also been rather stable, if not slightly positive. The US economic recovery has exuded a confident strength, with solid traction in jobs growth. Consumption indicators have also started to edge up, with anecdotes of wage increases at Walmart, for example. Even over in Europe, Mr Draghi proved courageous enough to increase EU GDP growth from 1 to 1.5%, announcing that the region’s recovery is likely to begin to broaden and improve in the quarters ahead. Unnatural demand for oil may also offer a floor for the price. For example, the US Strategic Petroleum Reserves (SPR) in the US bought five million barrels from the market’s supply on Friday, stemming the slide that day. This buyback was somewhat expected in lieu of a sale in similar volume 12 months ago. It is interesting to note that the proceeds from the sale last year would have earned the SPR a 50% profit. Or, seen from another angle, they could have bought back more than twice the volume sold at the prices today, with the same proceeds from last year! Finally, as we approach the key summer driving months, we may also see inventory build begin to slow down, or even reverse. The growling bears in oil have sounded louder than ever, with even a US$20 per barrel forecast touted. Each new data release has painted a picture of gloom. However, oil bulls challenged to stay the course may seek comfort knowing that it’s always ‘darkest before dawn’. The question nonetheless remains whether we are there yet!
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