Friday, September 13, 2013
The weekly EIA energy stocks report released on Wednesday was deemed overall to be bearish by traders, as Crude Oil inventories fell by 219,000 barrels last week. Analysts, however, were looking for a decline of closer to 1.4 million barrels. Oil product supplies rose last week, with gasoline inventories posting a surprising 1.658 million barrel increase. Traders were expecting a 900,000 barrel decline. Distillate inventories rose by 2.586 million barrels, vs. estimates for a 400,000 barrel increase. Refinery utilization rose to 92.5% last week, although demand for Oil products fell, with gasoline demand down 489,000 barrels and distillate demand down 281,000 barrels the prior week. The one bright spot that Oil bulls focused on was a 639,000 barrel decline in Oil inventories in Cushing, Oklahoma. This is the delivery point for the NYMEX Crude Oil futures contract, and therefore weekly inventory changes are scrutinized more closely by Oil traders given its importance in the delivery process.
Crude Oil futures have been on a steady price climb since July, as conflicts in the Middle East combined with signs of an improving economic climate in both the U.S. and China have supported prices. However, with front month futures starting to look toppy, increasingly bearish fundamentals may signal a price correction ahead. On Tuesday, the Energy Information Administration (EIA) raised its estimate for U.S. Oil production by just over 15% for 2013 to 7.47 million barrels per day, as production from shale formations continues to increase. In addition, the EIA is forecasting production to increase by nearly 13% in 2014 to 8.43 million barrels per day. This resurgence in U.S. production should allow the U.S. to continue to reduce its dependence on foreign oil, with the EIA reducing its imports estimates for 2014 to near 6.5 million barrels per day. U.S. Oil demand, however, is not keeping pace with increased production, as the EIA forecasts U.S. Oil demand will increase by an anemic 0.2% in 2014. Global risks have also cooled somewhat, as some conditional support has been vocalized by U.S. officials for a Russian proposal to place Syrian chemical weapons under international control. If an agreement can be reached without any military intervention, it could cause traders to remove some of the "risk premium" from oil prices, particularly in Brent Crude.
Turning to the chart, we see the September Bonds consolidating above support at the 132-00 mark. Looking at the daily chart for November Crude Oil, we notice prices moving higher, but in a stair step fashion that is making it difficult for weak bulls to hold on to their long positions. Prices are above the 200-day moving average (MA), but are holding near the shorter-term 20-day MA. Momentum as measured by the 14-day RSI has turned neutral after hovering near overbought levels last week, with a current reading of 53.99. The "spike" high of 111.34 made on August 28th is seen as resistance for November Crude Oil, with support found at the August 8th low of 100.80.
Mike Zarembski, Senior Commodity Analyst