Crude oil trading outlook: WTI and Brent prices drop as Iraq, Ukraine conflicts weighed

WTI and Brent prices were deep in the red during early trade in Europe today, as investors assessed risks from the conflicts in Ukraine and Iraq.

WTI futures for delivery in September on the NYMEX traded at $96.63 per barrel at 7:40 GMT, down 0.47%. The contract lost about 0.3% last week, reaching an eight-month low at $95.26 per barrel.

Brent October futures on the ICE in London stood at $102.68 per barrel, down 0.48%, with daily low and high at $102.35 and $103.30 per barrel, respectively. The contracts premium to its US counterpart was at $6.05, after closing last week at a margin of $6.18. Brent dropped ~2% last week.

“There was a scare on Friday, but investors realized over the weekend that geopolitical threats are becoming less serious,” Avtar Sandu, a senior commodities manager at Phillip Futures in Singapore, said for Reuters. “We have a situation where inventories and supplies are rising. So with geopolitical risks seemingly easing, people dont want to hold long positions.”

Iraqi Kurds regained ground against jihadists of the Islamic State (IS), with help from US air strikes. The Kurdish forces, known as Peshmerga, captured Iraqs largest dam, and are looking to clear the whole Nineveh plain in norther Iraq in the coming weeks and months.

The fighting remains contained to Iraqs northern regions, well away from the biggest oil-producing and exporting facilities, concentrated in the south. The country pumps some 3 million barrels of crude daily and exports about 2.5 million through its southern terminal at Basra, with outlooks of growing output and shipments.

“The situation in Iraq is something that markets will continue to have front of mind,” Ric Spooner, chief strategist at CMC Markets in Sydney, said for Bloomberg. “That said, the most likely outcome is Baghdad will hold and there won’t be incursions into the south, or events that will really disrupt oil supply.”

Meanwhile, output form Libya climbed to some 0.55 million barrels daily, a government spokesman said on Sunday. Libyan production is still a fraction of what it used to be before a revolution toppled former dictator Muammar Gaddafi. The country holds Africas largest crude reserves, and has a potential output of ~4 million barrels per day.

Ukraine

The crisis in Ukraine did not seem to cool off, despite traders shrugging any risks over the conflict. Ukraine reported it has destroyed a column of armored vehicles entering Ukraine from Russia, while another column of rocket launchers was also seen entering rebel-controlled territory from Russia.

The Kremlin has repeatedly denied supplying rebels with weaponry such as the Buk missile launcher, which is thought to have downed the Malaysian airliner in June, killing 298 civilians.

The reports of heavy weaponry entering Ukraine comes as a Russian aid convoy was also poised to enter Ukraine through a rebel-controlled border crossing. Kiev has explicitly said that it would allow such aid only if the convoy passes into Ukraine through a government-controlled crossing. Russian authorities had said the convoy carried only humanitarian supplies and it was agreed with both Kiev and the International Committee of the Red Cross, but both denied to have agreed.

Meanwhile, Kiev made further progress against the rebels in Luhansk. Both separatist strongholds, Luhansk and Donetsk, have been besieged by government forces for several weeks now. The siege took a heavy toll on the civilian population, and easing the residents of the two cities is the official purpose of the Russian aid convoy.

Some western countries suspect the convoy of transporting military supplies to the separatists, and have demanded an international inspection of the cargo before it enters Ukraine.

The confrontation between the West and Russia over Ukraine brought forth the lowest point in relations since the Cold War. Several rounds of economic sanctions were imposed by both sides, as Russia accuses the West of trying to lure Ukraine away from the Kremlin.

Sanctions have so far failed to affect Russian energy exports, the biggest in the world. However, signs of increasing difficulties for Russian energy companies are seen, though disregarded by investors.

US inventories

The US Energy Information Administration (EIA) last week reported that crude inventories added 1.4 million barrels in the week through August 8. Gasoline stocks lost 1.2 million barrels, EIA reported, partially paring gains for crude. The largely expected drop came at peak US driving season and added to a 4.4m draw in the previous week. Meanwhile, distillate fuels, which include diesel and heating oil, were down 2.4 million barrels.

“Stocks are ample, output is rising and demand will see structural decline for years.” analysts at Bank of America Corp. said in a report last week.

The peak driving season typically ends on Labor Day, which this year falls on September 1. Lackluster demand and ~10% higher average output on an annual basis pressured both gasoline and crude prices this season.

“Refineries are making more than enough gasoline to meet domestic demand, which has helped push gas prices to the lowest level for this time of year since 2010,” Michael Green, a Washington-based AAA spokesman, said last week for Bloomberg. “It seems unlikely that an increase in road trips over Labor Day weekend would reverse this summer’s gas price decline based on current conditions.”

Technical support and resistance levels

According to Binary Tribune’s daily analysis, West Texas Intermediate September futures’ central pivot point on the NYMEX is at $96.69. In case the contract breaches the first resistance level at $98.07, it will probably continue up to test $98.78. Should the second key resistance be broken, the US benchmark will most likely attempt to advance to $100.16.

If the contract manages to breach the first key support at $95.98, it will probably continue to drop and test $94.60. With this second key support broken, movement to the downside will probably continue to $93.89.

Meanwhile, October Brent’s central pivot point on the ICE is projected at $103.11. The contract will see its first resistance level at $104.18. If breached, it will probably rise and test $104.82. In case the second key resistance is broken, the European crude benchmark will probably attempt to advance to $105.89.

If Brent manages to penetrate the first key support at $102.47, it will likely continue down to test $101.40. With the second support broken, downside movement may extend to $101.76 per barrel.