After a brief hiccup on Wednesday when Brent took a technical bounce off the $56 support level, oil prices have resumed their downward trends with both major contracts down on Friday and looking set to close lower on the week. The relentless growth in US crude inventories is continuing to exert strong pressure and not even a weaker dollar on Thursday was able to support oil prices. As the weekly supply data from the US Energy Information Administration (EIA) shows, stocks increased sharply again in the week to March 6, this time by 4.5 million barrels. Admittedly, this was a more modest build compared to recent times, but it was nevertheless the ninth consecutive weekly increase. During these past nine weeks alone, crude stocks have surged by a whopping 66.5 million barrels to repeated all-time highs.
Thus, until such a time we see a sustained period of destocking, the oil price will most likely remain under pressure as there is evidently too much oil than is currently needed. Indeed, the Internal Energy Agency (IEA) on Friday warned that the oil price collapse "has yet to run its course" as the US supply growth “so far shows precious little sign of slowing down." The EIA says that the unwinding of the seasonal refinery maintenance may slow US crude inventory builds in the second quarter of this year but “will not stop them, and stocks may soon test storage capacity limits.” If the EIA is correct, further price falls may have to occur soon for the supply and demand forces to find equilibrium. But on a brighter note, the EIA says that the demand growth for crude has risen steadily, with demand for oil products rising “unexpectedly” strong. Demand for crude products in Europe increased by 3.2% in December and 0.9% in January. If this strength in product demand can be sustained – and there is a good chance it will with the recent upsurge in euro zone macroeconomic data surprises – then it will undoubtedly offer some support to oil prices, in particular the Brent contract.
In the short term however, prices are likely to remain under pressure, for the technical outlook does not look great for either oil contracts. As can be seen, WTI has broken the short-term bullish trend line after it formed a triple top reversal pattern a couple of weeks ago. Several supports have been broken as a result, including the triple top neckline around $48 and another level at $46.80. WTI is now racing towards the $45 handle once more, where we also have the 161.8% Fibonacci extension level converging. If it does not find much support there then it may make a move down to the January low of $43.55, and who knows may be even lower still to the next psychological level of $40 a barrel. Up until now, Brent has managed to hold its own above the key 38.2% Fibonacci retracement level on a closing basis. If the buyers relinquish control of this key technical juncture, this may well lead to renewed technical selling towards the 50-day moving average at $55 or the 61.8% Fibonacci retracement at $52. As things stand, only a closing break above $58.50 resistance would invalidate this bearish setup.