Crude oil had become somewhat more stable in recent days as investors assessed the current supply and demand forces affecting prices. On the one hand, there have been tentative signs that oil production in the US is finally responding to the falls in rig counts. The rig count falls actually accelerated once again last week as it declined by an additional 31; at just 703 they are now at their lowest level since October 2010. But on the other hand, oil inventories have been repeatedly hitting record levels since the turn of the year, which suggests that the oil market remains sufficiently supplied.
While the supply outlook appears mixed, the demand outlook for crude does not look great either following the recent slowdown of economic activity in the world’s largest consumers of oil, China and the US. Today for example saw the US GDP grew by a meagre 0.2% annualised rate in the first quarter. To say it disappointed expectations is an understatement, for the market was looking for at least a 1% growth rate. As a result, the US dollar plunged and this in turn helped to underpin some dollar-priced commodities, including crude oil.
Crude oil got an additional boost from the latest weekly inventories data. As the API data last night had suggested crude inventories may have increased by 4.2 million barrels last week, analysts and traders alike were not feeling too optimistic about the official numbers from the EIA. However as it turned out, the EIA numbers were actually not too bad even if crude stocks rose a fresh record high of 490.9 million barrels. The weekly increase of 1.9 million barrels was not only lower than the API’s estimate but it was also lower than the consensus forecast of 2.1 million barrels. What’s more, inventories at the storage hub of Cushing in Oklahoma decreased for the first time since November, by 514,000 barrels. As a result, oil prices surged higher as hopes grew that we may now see a period of destocking.
WTI found additional support from technical buying once the $58.25/60 resistance area was cleared. All eyes are now on the FOMC statement, due at 19:00 BST, in which the Fed is likely to deliver some dovish remarks. If seen, the dollar could fall further and this may in turn underpin the buck-denominated crude oil. Our technical view on US oil will remain bullish for as long as the bullish trend remains intact. If and when this is broken, we may then see a sharp drop in oil prices. But for now, the path of least resistance remains to the upside with $60 now being the next target for the bulls. Above this psychological barrier is the 161.8% Fibonacci extension level of the last significant downswing at $61.70. To get past these levels, oil speculators would probably need a favour or two from the Federal Reserve tonight.