Crude oil trading outlook: futures fall on US strike action, OPEC output

Both West Texas Intermediate and Brent crude slid on Monday following Fridays hefty gains amid speculation that US unions calling a strike at nine refineries will curtail crude oil demand, while OPEC boosted output in January. A contraction in Chinas manufacturing sector last month also weighed on prices.

US crude for delivery in March slid 2.69% to $46.94 per barrel by 8:30 GMT, having shifted in a daily range of $47.84-$46.67 per barrel. The contract soared 8.33% on Friday, the most since June 2012, to settle at $48.24 per barrel.

Meanwhile on the ICE, Brent for settlement in the same month dropped by 2.49% to $51.67 per barrel, shifting in a daily range of $52.95-$51.41. The contract surged 7.86% on Friday to $52.99 a barrel, having earlier jumped to a 3-1/2-week high of $53.08. Brent traded at a premium of $4.73 to its US counterpart, down from Fridays settlement at $4.75.

Oil prices surged on Friday after news of a record weekly decline in US oil drilling triggered a frenzy of short-covering. Data by Baker Hughes Inc. showed that US drillers idled 94 oil rigs last week, the most since the company began tracking data in 1987, sending the total number of operating units to the lowest in three years.

However, the biggest strike at US refineries since 1980 threatened to curb US crude consumption, sending the market falling. The United Steelworkers union, which represents employees at more than 200 US refineries, pipelines, chemical plants and terminals, announced strikes at nine US refineries on Sunday for failing to agree on a labor contract. The union rejected five propositions by oil companies since talks began on January 21st. The refineries represented by the union account for two-thirds of US refining capacity.

A prolonged nationwide strike action would imply curtailed US crude oil consumption and smaller refined product inventories, analysts said.

This comes at a time of rising OPEC crude output. According to a Bloomberg survey, members of the Organization of the Petroleum Exporting Countries pumped 30.91 million barrels per day in January, well above the groups official target of 30 million bpd, which it reaffirmed at its last scheduled meeting on November 27th in Vienna. The gain was led by an increase in supply from Saudi Arabia, Iraq and Angola, with Iraqi output jumping by 200 000 bpd to a record 3.9 million.

Oil prices have fallen by more than 50% since a June peak amid fears a slowing global economy will fail to soak rising crude production, while OPEC resisted calls to cut its own output, denying any obligation to sacrifice its own market share to normalize prices for all producers.

China manufacturing

Also fanning negative sentiment, government data showed that activity in Chinas manufacturing sector contracted last month for the first time since September 2012, with the corresponding Manufacturing PMI coming in at 49.8 from 50.1 in December. Analysts had projected a jump to 50.2.

A separate private gauge showed that factory activity in China declined for a second straight month. The HSBC China Manufacturing PMI rose to 49.7 in January from 49.6 in December, mismatching a preliminary reading of 49.8. The report stated that Chinese manufacturers saw a fractional deterioration in operating conditions and although output slightly rose and new orders stabilized, employment levels were cut for the fifteenth straight month.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC commented in the report: “Both new orders and new export orders saw downward revisions, but still signalled marginal expansion. We think demand in the manufacturing sector remains weak and more aggressive monetary and fiscal easing measures will be needed to prevent another sharp slowdown in growth.

China, the worlds second-biggest oil consumer, will account for 11% of global demand in 2015, according to the International Energy Agency.

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate March futures’ central pivot point is at $46.97. In case the contract breaches the first resistance level at $49.62, it may rise to $51.01. Should the second key resistance be broken, the US benchmark may attempt to advance $53.66.

If the contract manages to breach the first key support at $45.58, it might come to test $42.93. With this second support broken, movement to the downside could continue to $41.54.

Meanwhile, March Brent’s central pivot point is projected at $51.61. The contract will see its first resistance level at $54.46 If breached, it may rise and test $55.93. In case the second key resistance is broken, the European crude benchmark may attempt to advance $58.78.

If Brent manages to penetrate the S1 level at $50.14, it could continue down to test $47.29. With the second support broken, downside movement may extend to $45.82 per barrel.