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Oil Prices Find Near-term Floor on Surprising Inventory Draw

Thursday, April 27, 2017

Today's Spotlight Market

Natural Gas futures rebounded off 2-week lows on Wednesday, as short-covering buying emerged ahead of this morning's EIA Gas storage report. In addition, traders noted that weather forecasts calling for below normal temperatures for most of the U.S. through at least the second week of May will moderate the amount of Gas that is put into storage ahead of the peak cooling season that starts in June.

Fundamentals

Following a $5-plus decline in prices the past two weeks on concerns that U.S. Oil production will continue to increase, as shale oil producers continue to lower the cost of production due to technological advances, it appears that the lead month June Crude Oil futures are starting to find some near-term support around the $49 per barrel price level. The market got a bit of support from the weekly petroleum inventory data supplied by the Energy Information Administration (EIA), which showed that U.S. Crude inventories fell by 3.6 million barrels last week. This was nearly 3 million barrels above analysts' estimates. It appears that refineries are ramping up fuel production following the usual seasonal maintenance period, with refinery utilization rising above 94% last week. On the flip side, increasing refinery production resulted in higher Gasoline and Distillates production last week, with Gasoline inventories rising by 3.4 million barrels and Distillates inventories climbing by 2.7 million barrels. Many traders were expecting modest declines in both products. As has been the case for over 40 years, the wild card to how Oil prices perform in the coming months may hinge on OPEC member nations and their willingness to stick to production quotas in order to keep global Oil supplies in balance with demand. With Oil prices still holding near $50, it may be difficult to keep all the cartel members in line, especially those nations who rely on proceeds from Oil exports to support the vast majority of government expenditures.

Technical Notes

Looking at the daily chart for June Crude Oil, we notice prices starting to consolidate just above the $49 per barrel price level. While prices are attempting to form a near-term bottom, we do note the market remains below both the 20- and 200-day moving averages and the 14-day RSI remains weak but is holding just above oversold levels, with a current reading of 36.87. Near-term support is found at the April 25 low of 48.87, with stronger support not found until the 47.50 price area. Near-term resistance is seen at the April 20 high of 51.38, with major resistance seen at 54.14.

Mike Zarembski, Senior Commodity Analyst