Crude oil faces higher production headwinds

Crude oil futures prices were under pressure during most of the week, as strong inventory builds and the increasing value of the U.S. dollar eroded crude oil prices.  Production growth in the U.S. continues to outweigh solid demand, pushing crude oil inventories above the average five-year range for this time of year.

On Tuesday evening traders got a first glance of estimated inventories.  According to the American Petroleum Institute crude oil supplies increased by 871,000 barrel for the week ended November. 1, 2013. The API reported gasoline stockpiles fell 4.3 million barrels while distillate supplies declined by 2.7 million barrels. Analysts expected gasoline supplies to be down 1 million barrels and looked for a decline of 1.5 million barrels in distillates.

The inventory numbers released by the Department of Energy were also negative for crude oil.  Crude oil inventories increased by 1.6 million barrels week over week. Gasoline inventories decreased by 3.8 million barrels last week and are in the upper half of the average range. Distillate fuel inventories decreased by 4.9 million barrels last week and are at the lower limit of the average range for this time of year. U.S. crude oil refinery inputs averaged about 15.1 million barrels per day during the week ending November 1, 2013, 16 thousand barrels per day above the previous week’s average.

On the demand front, total product demand over the last four-week period averaged 19.4 million barrels per day, up by 3.0% from the same period last year. Over the last four weeks, gasoline demand averaged about 9.1 million barrels per day, up by 5.4% from the same period last year. Distillate fuel demand averaged over 3.9 million barrels per day over the last four weeks, up by 8.2% from the same period last year.

Despite solid demand for products, crude oil production pushed supply above the upper end of the five-year average range.

Crude oil futures are consolidating average breaking below support which was created by an upward sloping trend line that connected the lows in May to the low in June that comes in near 95.70. Former support has now become resistance along with the 10-day moving average near 95.60.

Momentum on crude oil is negative with the MACD (moving average convergence divergence) index printing in negative territory.  The trajectory of the MACD is negative, after the index generated a sell signal in mid-October.  The relative strength index (RSI) which is an oscillator that measures overbought and oversold levels is printing near 32, but has moved higher over the past week after printing as low as 28, which is below the oversold trigger level of 30.

Looking forward crude oil futures are likely to trade in a broad range between $98 dollars a barrel and $86 dollars a barrel.  Production continues to remain robust which will likely cap upward movements in WTI prices.

About the Author

Marcus Holland is an editor at FinancialTrading.com, a guide to online trading that offers news, education and analysis of different financial instruments.

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