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Crude oil lower as supply concerns ease; inventories data eyed

Updated -  Jul 2, 2014 7:05:00 AM By Fawad Razaqzada

Both the major oil contracts are again a touch weaker today. Concerns over geopolitical risks have diminished in recent days despite the end of the ceasefire in Ukraine and as the ISIS advance continues in Iraq and Syria. In Iraq, most of the bad news has already been priced in, so it may take a significant escalation of the conflict there for oil prices to find renewed strength on just this one factor. What’s more, investors are making a more sober assessment of the conflict there, realising that most of Iraq’s oil is exported from refineries in the south of the country, where the situation is normal. On top of this, the rebels in eastern Libya have re-opened two oil ports, namely Es Sider and Ras Lanuf. According to Reuters, some 500 thousand barrels of oil per day will potentially become available to export, thus easing supply worries in the region. In short, it is the easing of worries about supply, combined with concerns over demand, which explains why oil prices have been weaker. As a result, Bent has taken out another support level, this time the $112.40 handle which has thus paved the way for a move towards $111.00 or even $110.00 a barrel.

In the US, WTI is still weighed down by last week’s surprise 1.7 million-barrel build in crude stockpiles, as well as some mixed-bag economic data of late. Today, the Energy Information Administration (EIA) is expected to announce that oil stocks decreased by 2.2 million in the seven days ended June 27. If correct, this would be the largest drawdown since early June and may provide some support to the price of WTI. However, data from American Petroleum Institute (API), released last night, suggests that the potential drawdown could be smaller, which may be why oil prices are under pressure this morning. The API said crude stocks fell by just under 0.88 million barrels last week while gasoline stocks decreased by 0.4 million. Meanwhile investors will also watch the latest report on the US jobs market from the ADP this afternoon for clues on demand. This is expected to show that private sector jobs increased by 210 thousand in June, which would be above the previous month’s 179 thousand increase. A better than expected number would bode well for the official jobs report tomorrow, and may provide support for oil. The opposite is also true, of course.

We have been banging on about the $105 support level on US oil for a few weeks now. Although WTI has broken below this key level on an intra-day basis, so far it hasn’t finished below it on a daily time frame. For as long as it holds above here, the chances for another rally are there in the near-term. The next support is seen around $103.00/50, where a bullish trend meets the 50-day moving average. Meanwhile the Relative Strength Index (RSI) has already broken its trend line. This does not bode well for the bulls as it suggests the underlying price of WTI may also break its own trend and head sharply lower.

Figure 1:

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Figure 2:

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Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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