Oil prices managed to recover from sharp losses yesterday, but still remain in the red on the week. At the start of today’s session, prices were a little weaker as speculators made a more sober assessment of yesterday’s oil report. At first sight, the EIA’s weekly crude stocks data appeared bullish. After all, the headline drawdown in US oil inventories of 4.6 million barrels was much better than 1.4 million expected. What’s more, stocks of gasoline also fell while crude oil processing rose more robustly than expected. However, stocks of crude oil at Cushing rose by a sharp 3.7 million barrels. On top of this, distillate stocks rose, as too did US oil production. However, the market chose to focus on the good aspects of the oil report and price responded positively as a result. Market participants probably chose to ignore the latest rise in US oil production because of the fact that OPEC’s own production appears to be falling at the same time. According to a Reuters survey, OPEC’s production fell by 90,000 barrels per day in March compared to the previous month. This is unlikely to last – we expect the OPEC to ramp up its output back towards its agreed production levels. Overall, the oil market remains amply supplied and we don’t expect prices to move up in a meaningful way over the course of the year. We think that the upside is limited and that the risks are skewed to the downside.
However, for the time being, the technical outlook remains modestly bullish and prices may continue pushing higher a little further before we potentially see the top. In fact, WTI formed a long-legged doji candle on its daily chart yesterday. This pattern is typically bullish when it occurs after a pullback. This particular one has actually happened at support between $62.20 and $62.55, and above the 50-day moving average at $62.78. So far however there hasn’t been any follow-through on the upside as resistance between $63.75 and $64.20 has held firm. If and when this resistance range breaks only then may we see some follow-up technical buying pressure. If this bullish scenario plays out, then we wouldn’t be surprised if WTI were to climb back towards the top of its range and this year’s earlier high at $66.60/5 area over the coming days.
However, if the abovementioned doji candle turns out to be a false signal and price breaks below it in the coming days then this would be a bearish development. In this potential scenario, WTI will most likely head below the recent range low at $60. And if there is acceptance below $60 then who knows how much further it may drop.
But that is the alternative scenario; our base case is that it will push higher given the formation of the bullish-looking candle yesterday. In any case, conservative traders may wish to wait for price to make up its mind before deciding on the direction. And given the recent choppy price action, traders may wish to remain nimble and trade from one level to the next, rather than looking for swing/position setups.