WTI Crude: Stable At 101, Despite Sharp Inventory Declines

So we’ve heard about the potential supply crunch due to unrest in Egypt, and we’ve also heard about the increase in demand of crude oil due to slightly improving US economy. We’ve also seen API numbers showing a larger than expected decline on Tuesday. Hence, the market was relatively ready for a lower than expected inventory print by the Department of Energy yesterday. Nonetheless, market was still positively shocked when the latest inventory numbers were released, showing a decline of -10.3M barrels, the sharpest W/W decline since the week of 4th Jan. This is also the week with the highest differential between actual and expectations since the same week of 4th Jan.

The decline is not only observable in Crude Oil inventories, but is equally felt in both Distillate and Gasoline inventories. Crude inventories at Cushing Oklahoma grew, but at a much slower pace than previous week. To top it off, even Natural Gas storage fell, a high anomaly considering that we are entering into summer, where usage of heating gas is expected to fall significantly.

Hourly Chart

The sharp fall in inventories of energy commodities push crude oil higher. However, market was not surprised enough to sustain a bullish push for new weekly highs, with price merely tagging 102.0 and then move lower, similar to what has happened during early Asian session yesterday.

There are a few reasons why Crude Oil prices weren’t able to take off despite the extremely bullish news. For starters, yesterday was a half trading day due to the Independence Day bank holiday on 4th of July. Hence it is possible that traders and speculators did not wish to partake in any moves. Also, the strong resistance around 102.0 (ceiling from Nov – Feb 2011 and floor from Feb – April 2012) allowed bears to sell confidently whenever price reaches the critical level. Whatever the reason may be, the fact is that price retreated back lower quickly, trading below 101.0 but supported above 100.65, the interim support for the post 100.0 levels.

From a technical perspective, bias is still to the upside with potential support from rising Channel support and the 100.65 line. However, stochastic indicator appears to be topping and could signal a bearish cycle signal especially if price breaks the 2 support lines.

A cause for concern for bulls is that Price also failed to break into new highs despite notable USD weakness during yesterday US trading hours. This suggest that bullish momentum is facing significant resistance above 102.0, or perhaps there is still some weakness in Crude Oil. The unrest in Egypt may prove to end soon with the incumbent president already ousted, while global economy is still highly depressed. As such, the supply crunch and increase in demand may prove to be a flash in the pan, and we could potentially see long-term corrective selling downwards especially if price breaches below 100.0. Continue to keep a close watch on Crude, as we are certainly in for a ride.

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