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    Crude: excess oil supply outweighing brighter demand prospects

    Crude oil has given back a good chunk of the gains made earlier in the week. Oil prices have started to fall from Wednesday afternoon as traders took profit ahead of the official crude oil supply data later that day.  As you may be already aware, the US Energy Information Administration (EIA) reported that crude stocks decreased by a good 6.8 million barrels last week, meaning they have now fallen for the sixth time in as many weeks. Gasoline inventories also fell sharply, pointing to a strong start to the US driving season as motorists take advantage of “cheaper” fuel prices. Indeed refineries processed crude at a nearly record-high rate. But despite all this good news, WTI has not been able to extend its gains on Wednesday afternoon. Part of the reason is that the American Petroleum Institute (API) had already reported similar numbers on Tuesday evening, so most of the good news was already priced in.

    Traders were also cautious ahead of the monthly crude oil report from the International Energy Administration (IEA), after the EIA’s report had predicted a small rise in oil demand for 2015 of 20,000 barrels per day to 1.25m b/d.  While the IEA also raised its demand forecasts – to 1.4m b/d, no less – the report conveyed a more bearish outlook as it said global oil production growth was “exceptionally high” despite signs of a slowdown in non-OPEC supply, notably in the US. Last week, the OPEC agreed to maintain its 30 mb/d production quota unchanged for another six months. But according to the IEA, the cartel pumped more than 1m b/d above this target for three consecutive months. The largest OPEC producers are leaving the taps wide open, with Saudi, Iraq and the UEA all pumping at record monthly rates in May.

    The oil market surplus could hit new highs if Iran were allowed to make a full return to the market, with the deadline for the nuclear agreement, set for June 30, just a couple of weeks away now. It is also worth remembering that if prices start to rise more markedly then US shale oil companies may well ramp up production once more. This shouldn’t be too difficult to achieve as the infrastructure is already there. Thus the global supply surplus may remain in place for a lot longer than some might expect. This therefore could provide a firm ceiling to prices in the medium term.

    In the short term, however, the brighter demand outlook and the recent sharp falls in crude stocks, combined with a slightly weaker US dollar, could provide oil some support.

    From a technical point of view, both the major crude contracts have pulled away after testing key resistance levels in mid-week. WTI has once again stalled around that $61.70 mark where it had struggled previously. Some bullish traders may have decided to book profit there and this alone may have exerted some pressure on prices, so it remains to be seen whether a closing break above $61.70 could be achieved later on today or early next week. If seen, the bulls may then aim for the early May high of $62.55 as their next target. Thereafter, the 200-day moving average comes in around $63.00, followed by the Fibonacci extension levels of the most recent downswing at $64.20 and $66.30. The long-term 38.2% Fibonacci retracement of the swing from June 2014 comes in at $67.10. Meanwhile support could be provided around the psychological $60 handle or further lower around $58.00 where the 50-day moving average converges with the bullish trend line. For as long at this level holds as support the near-term technical outlook would remain bullish.  If broken then a move towards $54.00 could get underway next week.

    Meanwhile Brent has failed to break above its 61.8% Fibonacci level of the most recent downswing at $66.30. If it eventually breaks above here then we could see the London-based oil contract make a move towards the May high at $69.60 where it will also meet the 200-day moving average. Thus the potential for a double top reversal around that level is there. So far however, the developing bullish trend line has managed to hold firm after several tests, while a shorter-term bear trend has also broken down. Like WTI, for as long as price remains above the bullish trend line, our near-term technical outlook on Brent will correspondingly remain bullish.

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    Figure 2:

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