Crude oil trading outlook: WTI and Brent futures lower ahead of US oil inventories reports

WTI and Brent futures were lower during early trade in Europe today, but still close to nine-month highs. Iraq was quiet overnight, but the threat to output stood as firm support. The American Petroleum Institute will post its report on weekly oil supplies gains for the US later today, before the official log tomorrow.

West Texas Intermediate futures for settlement in July traded for $106.52 per barrel at 7:31 GMT on the New York Mercantile Exchange, down 0.36%. Prices ranged from $106.44 to $106.84 per barrel. The US contract was unchanged yesterday, at -0.01%, after it added about 4% last week, reaching a nine-month high at $107.68 on Friday.

Meanwhile on the ICE in London, Brent futures due in August stood for a 0.28% drop at $112.62 per barrel at 7:35 GMT. Daily high and low stood at $113.03 and $112.53 per barrel, respectively. Brent’s premium to August WTI stood at $6.69, after Mondays closing margin of $6.64. The European contract added 0.43% on Monday, after it also gained about 4% last week, also reaching a nine-month high at $114.07 on Friday.

Iraq

Iraq dominated oil markets since late last week, as an Islamist organization, linked with al-Qaeda and boasting up to 5 000 fighters, according to the BBC, launched assaults on towns and army bases across the northwestern half of the country. The group, called ISIL (Islamic State in Iraq and the Levant), is a Sunni extremist brigade, fighting against a Shia-led government in Iraq.

Iraqi authorities reported “successful counterattacks” and claimed to have retaken a number of towns over the weekend. A major counter-offensive against the militia-controlled city of Tikrit will probably take place soon, the BBC reported.

ISIL, which is composed mainly of religious extremist, is said to also be employing former Iraqi military officers and soldiers, who were loyal to the late dictator Saddam Hussein, himself a Sunni. Other than former military and extremists, some tribal leaders have also expressed their loyalties to the ISIL, while others have declared otherwise, sending troops to aid Baghdad’s military. Meanwhile, Shia clerics have announced a “Call-to-arms” for volunteers to join the fight against the Sunni-led onslaught.

On the international level, Iran and the US expressed readiness to work together, with the goal of halting the extremists’ advance in Iraq and helping the country battle the “terrorists” (Iran is the only country, other than Iraq, to be populated mostly by Shia Muslims). The US has deployed an aircraft carrier in the Gulf and some 250 military personnel to reinforce security for embassy and diplomatic staff.

“In the absence of a direct attack on Baghdad, we could see a further moderation in prices,” Michael McCarthy, chief strategist at CMC Markets in Sydney, said for Bloomberg. “We’ll need to keep a risk premium until there’s some sort of resolution. The key driver is the Middle East.”

US demand

The US, the worlds top oil-consuming economy, will post several key indicators today. Foremost, the key CPI figure for May will be revealed today, and analysts expect a standing of 0.2% growth on a monthly basis, after 0.3% in April, and an unchanged 2.0% annual CPI for the month of May. CPI is a leading indicator for consumer spending, which generates about 80% of US GDP.

The reading on the annual CPI is also a main indicator, used by the Federal Reserve to gauge the direction of the economy, and therefore make adjustments to monetary policy. As previously indicated, the CPI target for the Fed is 2.0% on a yearly basis, and it acts towards it.

The Federal Open Market Committee (FOMC), which makes the decisions on policies, will meet tomorrow. On the agenda are the key decisions on interest rates and on monthly assets purchases. Experts forecast another $10bn trim to purchases, while the main interest rate is expected to remain unchanged at 0.25%.

FOMCs decisions have a significant impact on financial markets, as rates dictate short-term dollar valuation trends. Also, the US stimulus program, which buys assets worth tens of billions of dollars each month, has been a sizable support to the economy, and a cutback would mean less “easy” business. However, the cutback would be implemented only if the economy has been recovering well, and there are indications that it has been, given a 2.0% annual CPI for two months in a row.

Later today, the US will also post housing data for May. Building permits are projected to stand for -0.1% on a monthly basis at 1.050 million, the highest reading since July 2008. Meanwhile housing starts have probably declined by 3.7% since April, for a reading of 1.034 million, after a 13.2% monthly growth was logged the previous month. The real estate sector accounts for about 13% of US GDP.

Oil supplies

The private American Petroleum Institute (API) will reveal its reading on oil inventories levels for the week ended June 13 later today. Analysts project a 0.250 million-barrel gain for crude supplies. A Bloomberg survey suggested 0.750 million drop. The official report is tomorrow.

Last week, the US Energy Information Administration (EIA) posted its weekly oil inventories report for the seven day through June 6 on Thursday. The log revealed a 2.6-million-barrel drop for crude oil inventories, with a sizable decline for imports, which have now dropped almost almost 20% over the last two weeks. Meanwhile, gasoline stockpiles added 1.7M barrels, while distillates gained 0.9 million. The report also revealed sizable drops for distillates and gasoline production, with a downturn in the refinery utilization rate.

Technical view

According to Binary Tribune’s daily analysis, in case the West Texas Intermediate July future on the NYMEX breaches the first resistance level at $107.44, it probably will continue up to test $107.97. Should the second key resistance be broken, the US benchmark will most likely attempt to advance to $108.41.

If the contract manages to breach the first key support at $106.46, it will probably continue to drop and test $106..03. With this second key support broken, the movement to the downside will probably continue to $105.50.

Meanwhile, August Brent on the ICE will see its first resistance level at $113.37. If breached, it will probably rise and probe $113.80. In case the second key resistance is broken, the European crude benchmark will probably attempt to advance to $114.32.

If Brent manages to penetrate the first key support at $112.42, it will likely continue down to test $111.90. With the second support broken, downside movement may extend to $111.47 per barrel.