Crude oil trading outlook: futures fall below 5-1/2-year low ahead of US supply data

Oil prices slid for a fourth day, falling below a 5-1/2-year low, before government data in the US shows that inventories in the worlds top consumer allegedly remained unchanged at the highest level since June.

US crude for delivery in February traded 1.36% lower at $52.88 per barrel at 8:46 GMT, having shifted in a daily range between $53.89 and $52.70, the lowest since May 2009. The contract plunged 2.05% on Monday to $53.61.

Meanwhile on the ICE, Brent for delivery in the same month fell 1.69% to $56.90 a barrel, having earlier declined to $56.74, also the lowest since May 2009. The European crude benchmark slid 2.64% yesterday to $57.88, settling at a premium of $4.27 to its US counterpart. The gap narrowed to $4.02 on Tuesday.

Government supply data on Wednesday is expected to show that US crude oil inventories were unchanged at 387.2 million barrels in the week ended December 26th, the highest since June, exacerbating concerns of a global supply glut.

The Energy Information Administration reported last week that US crude stockpiles surged by 7.267 million barrels in the seven days through December 19th. Supplies at the Cushing, Oklahoma hub jumped to 28.8 million barrels from 27.8 a week earlier, reaching the highest since March.

US crude output was at 9.127 million barrels per day from 9.137 million the previous week, which was the highest for recorded weekly data spanning to January 1983.

Total motor gasoline inventories jumped by 4.083 million barrels to 226.1 million, the highest for this time of the year in weekly data spanning back to 1990, while distillate fuel stockpiles rose by 2.303 million barrels to 123.8 million, the highest in nine weeks. Industry group the American Petroleum Institute is scheduled to release its separate private inventory data later in the day.

Hong Sung Ki, a commodities analyst at Samsung Futures Inc., said for Bloomberg: “The market’s oversupply isnt an issue that could be solved in the short term. Oil prices are suffering as OPEC members, led by Saudi Arabia, firmly hold on to their stance to maintain output.”

OPEC resistance

Oil prices have fallen more than 45% this year, set for the biggest annual decline since 2008, as the US boosted output to the highest in more than three decades, driven by a combination of horizontal drilling and hydraulic fracturing. Meanwhile, OPEC, steered by leading producer Saudi Arabia, reached a collective decision on November 27th in Vienna not to scale back production, ignoring calls from smaller members to cushion the price fall, in order to defend its market share.

The group’s leading producers have underscored their determination to cope with even lower prices in order to defend market share.

“Whether it goes down to $20, $40, $50, $60, it is irrelevant,” Saudi Arabian Oil Minister Ali Al-Naimi was cited saying, referring to production levels relative to oil prices.

Meanwhile, Saad Al-Hadithi, a spokesman for the Iraqi prime minister’s office, said that Iraq approved a budget of 123 trillion dinars ($103 billion) for 2015, compared to previous plans of 141 trillion dinars. The spending plan was based on oil prices of $60 per barrel and reflected the second-biggest OPEC producer’s adjustment to the market’s current state and the country’s willingness to defend its market share.

Some support was provided by supply disruptions in Libya where fighting between government forces and Islamist militias has halted exports this month from the countrys biggest and third-biggest ports, Es Sider and Ras Lanuf.

US economy

A brighter US economic outlook provided some support, with Commerce Department data last week showing that the US economy blew past expectations and expanded by 5% in the third quarter, while consumer sentiment in December reached a pre-recession high, according to the University of Michigan.

However, a stronger dollar, boosted by the upbeat US data, also weighed on the oil market. The dollar hovered near the highest since early-2006 against a basket of six major trading partners.

Some support was also drawn by China and Japan planning to boost liquidity. The People’s Bank of China intends to loosen loan-to-deposit ratios for banks in 2015, CNBC reported, while the Japanese government approved on Saturday stimulus spending of the equivalent of $29 billion to aid the country’s slower developing regions.

However, data later in the week provided by HSBC and Markit Economics is expected to show that manufacturing activity in China probably contracted in December, with the HSBC Manufacturing PMI projected to come in at a 7-month low of 49.5.

Market players will also eye remaining key economic data from the US to gauge demand prospects. Due throughout the week are Tuesday’s Conference Board Consumer Confidence and home prices, Wednesday’s initial jobless claims and pending home sales, as well as Friday’s ISM Manufacturing PMI.

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate February futures’ central pivot point is at $54.08. In case the contract breaches the first resistance level at $55.27, it may rise to $56.92. Should the second key resistance be broken, the US benchmark may attempt to advance $58.11.

If the contract manages to breach the first key support at $52.43, it might come to test $51.24. With this second support broken, movement to the downside could continue to $49.59.

Meanwhile, February Brent’s central pivot point is projected at $58.56. The contract will see its first resistance level at $59.75. If breached, it may rise and test $61.62. In case the second key resistance is broken, the European crude benchmark may attempt to advance $62.81.

If Brent manages to penetrate the S1 level at $56.69, it could continue down to test $55.50. With the second support broken, downside movement may extend to $53.63 per barrel.