WTI Crude Oil Outlook Remains Murky

After all, the recent big increases in rig counts point to increased levels of production in the US. If growth in demand does not keep up, crude inventories are likely to rise again.

After falling for the past two days, the price of WTI oil has bounced back off its lows to trade flat to slightly firmer at the time of this writing on Thursday morning. However WTI still remains in the red three and half days into the week. As a reminder, oil prices rallied last week and made back a significant chunk of their losses from the week before, but not enough to turn positive on the month. At $61.30, WTI thus remains more than $5 or 8% below the high of $66.62 hit on January 25. In other words, oil prices have been trending lower since hitting their best levels since 2014 at the start of the year.

Rising US oil production likely to limit price gains

Up until the start of February, oil prices had been on the rise with WTI climbing for five consecutive months. Part of the reason for this had been compliance with the production cuts by OPEC and non-OPEC countries remaining surprisingly high. The rally was aided further by significant reduction of crude stocks at Cushing in recent weeks. However, it remains to be seen if oil prices will be able to push back higher from here. I, for one, am doubtful about the prospects of seeing significantly higher oil prices in the near term. After all, the recent big increases in rig counts point to increased levels of production in the US. If growth in demand does not keep up, crude inventories are likely to rise again. What’s more, the OPEC will not be able to keep its production agreement with other non-OPEC members for too long should the US continue to win more market share.

Canada’s crude problem

And let’s not forget about Canada. The problem there is probably more severe than in the US. After all, Canada’s main export market is its southern neighbour – the US, which is fast becoming self-sufficient in its energy needs. So, it doesn’t really need Canadian oil. As a result, Canadian oil companies are forced to sell crude at a significant discount. With Canada’s oil selling at just $34 per barrel, this represents a 45% discount to US oil. Canada wants to deal with the problem by building new pipelines so that it could exports its oil elsewhere, but there have been delays in approving the plans and this is costing the Canadian economy dearly. So, the Canadian dollar is not just falling because of expectations that oil prices will remain low, but also because of Canada’s own crude problems.

EIA oil stockpiles in focus

Today’s focus is on crude inventories data from the US Energy Information Administration (EIA). Last night, the American Petroleum Institute (API) reported that US crude stocks unexpectedly fell as imports slumped. Crude stocks at Cushing fell sharply again, this time by 2.6 million barrels, while stocks of distillates decreased by 3.6 million. If the official EIA data confirm these figures then we may see WTI stage a more meaningful recovery. However, if they contradict the API numbers then oil prices may head lower again as concerns over supply resurface.

WTI’s technical outlook doesn’t look too great

Regardless of what happens today fundamentally, the technical outlook doesn’t look too great at the moment. WTI’s inability to hold above the 2015 high of $62.55 last month was clearly a bearish development as price subsequently fell sharply. It has since found some support around old resistance in the $58.20 to $59.00 region. At the start of this week, WTI has again tested the 2015 high and so far, the buyers were unable to push above that level and we are back within the range of last week’s price action. Unless the buyers step up their game, there is a danger we could see WTI take another dive in the coming days and break that noted $58.20-$59.00 support area. If this scenario plays out then prices could potentially accelerate their falls as the longs scramble for the exits. From a bullish point of view, a break back above $63.80 would be ideal, unless we see a significant reversal price pattern at lower levels first.

Source: eSignal and FOREX.com. Please note, this product is not available to US clients

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