West Texas Intermediate oil dropped to a fresh 12-year low at just below $27.50 this afternoon, thereby revisiting the low it had hit in January. Here, it bounced as traders took profit ahead of the official oil inventories data from the US Energy Information Administration (EIA). According to the EIA, oil stocks actually fell by 750 thousand barrels in the week ending February 5. This was clearly a surprise to the market as the American Petroleum Institute (API) had reported a build of 2.4 million on Tuesday, while analysts were expecting a slightly larger build of 3.1 million barrels. So, oil prices jumped for a time to above $29.00 a barrel. However, WTI fell back sharply from there as oil traders analysed the detail of the report and realised that stocks of oil products rose across the board, while oil inventories at Cushing rose for the thirteenth consecutive week. Consequently, WTI fell back to trade at $27.55 at the time of this writing.
Yesterday saw both oil contracts plunge with prices suffering one of their biggest daily falls in recent years. Once again it was the same story that caused prices to fall: continued worries about excessive supply of oil and as the odds of an output cut from Russia and the OPEC decreased. News that Iraq produced record amounts of oil in January, coupled with rising supplies from Iran, means that OPEC oil production is rising unabated. Indeed, according to the OPEC itself, oil output from the cartel rose by 130 thousand barrels per day to 32.33 million bpd in January. The OPEC also trimmed its oil demand growth forecast slightly. Nevertheless, hopes for a deal still linger after Iran's oil minister said his country was ready to negotiate with Saudi Arabia and the OPEC in an effort to shore up prices. But so far it has only been talks and no action. Thus, unless US shale oil supply responds in a meaningful way now, the near term outlook continues to remain bleak for the black stuff.
That being said, I still think that we are very close to a bottom since most of the bad news is in the price now, with crude prices also being at or near production costs for many oil producers. As we went to press, WTI was again testing the January low of $27.50/60 area. While it could easily drop further, there is a small possibility that it could bounce from here given for example that the RSI is in a state of bullish divergence with price. If WTI does bounce back it will need to break $29.35 resistance level in order to attract potential buyers. A decisive break below $27.50 however could pave the way for a move towards the next psychological level of $25.00. Brent meanwhile was also testing a key level, namely the psychologically important handle and 61.8% Fibonacci retracement of its most recent rally around $30. As the fundamentals are still weak and the path of least resistance to the downside for oil, bullish traders should remain nimble, for now.