Crude oil remains pressured on output/demand uncertainty

  • US crude oil remained pressured on Thursday after a recent rebound from this week’s year-to-date lows. This pressure persisted despite a weaker dollar post-FOMC and a surprise draw in US crude oil inventories last week, the first decline in ten weeks.
  • Helping to keep crude oil prices pressured was concern over several factors, including whether the current OPEC output deal would be extended, a report by the International Energy Agency asserting that oil demand is expected to drop from 1.6M barrels a day last year to 1.4M in 2017, and OPEC’s recent monthly report stating that Saudi Arabia, its largest oil producer, had raised its output in February by 263,000 barrels per day.
  • Perhaps the most critical factor for crude prices going forward will be the deal to cut output among OPEC and a few non-OPEC nations. There is currently a June deadline on this deal, and although Kuwait has agreed to an extension, Saudi Arabia has said that it is too early to consider doing so. Exacerbating this situation is the question of non-OPEC compliance, particularly Russia, which has been a key participant in the deal.
  • The most pressing non-OPEC concern, however, continues to be the US, which is not a participant in the deal and has continued to expand drilling and production. Despite last week’s reported draw in oil inventories, projections of sharply increased output from the US have weighed on the effectiveness of OPEC’s deal to control prices. Making matters potentially worse for oil, the Trump Administration continues to be highly supportive of increased US exploration and production.
  • Where does all of this leave the outlook for crude oil prices going forward? The potential negative factors of persistently high supply and possibly lower demand may indeed outweigh the positives related to OPEC’s output deal. Even if the deal is extended further and all current participants continue to participate faithfully, prolific production by the US and other non-OPEC countries in offsetting OPEC’s cuts should not be underestimated.
  • From a technical perspective, US oil, represented by the West Texas Intermediate benchmark, recently slid to new lows within the past week, breaking down below the key $49.00 support level as well as the 200-day moving average. Earlier this week, price then reached a low around $47.00 before rebounding and forming a hammer candle in the process. Currently, the rebound has met some resistance around the noted $49.00 level and 200-day MA, as the abovementioned concerns have weighed. If price respects this resistance and resumes its downward trajectory, the next major downside target is at the key $45.00 support level.

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