Oil inventory builds add to bear trend

Quote of the Day

They can because they think they can.

Virgil

Selling has continued overnight in the oil complex on all of the normal worries plus the much larger than expected build in crude oil inventories reported in last night's API report (see below for more details). So far this morning the $92.50 Jul WTI technical support area held while the July Brent $109.50 tech support area also held. Whether or not this is a true hold on support or nothing other than a small dead cat bounce is certainly the main question of the day. The June Brent contract expires today and the June WTI contract expires on Tuesday. I am only focusing on the July contracts.

Let's ask the question as to what is going to make oil prices firm rather than discussing the current trading pattern from the downside. Unfortunately for the remaining bulls in the market there is not much out there to support a view of higher oil prices in the short- to even medium-term. The only unpredictable event that can change the current course of oil prices in the short term is a sudden collapse in the talks between Iran and the West. At the moment that looks highly unlikely as relatively high level technocrat meetings have been taking place this week (ahead of the main meeting on May 23) and the dribbling of comments from the meetings have been favorable with more progress being made.

Barring a geopolitical event, all other normal price drivers for oil and the broader commodity and equity complex are all simply bearish as of now. The fundamentals of oil are becoming more bearish as the inventories continue to build around the globe. In the IEA report last week they reported OECD inventories are now above the five year average while crude oil inventories in the US are at the highest level going back to the early 90s and well above the levels seen during the heart of the financial crisis a few years ago. Even with the EU embargo of Iranian crude oil purchases the global oil industry has been rebalancing itself... much as I indicated it would months ago... coupled with additional production coming from Saudi Arabia. At this point in time the Iranian's have been impacted by the embargo while the west has not (basis prices below the level they were at when the embargo was announced on January 23rd).

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