Crude Oil fell yesterday, reversing the slight recovery that started on 24th October. Prices were a tad softer towards the US closing session of Monday, but the ability of price to stay above 98.50 per barrel was a good sign that the recovery rally was still in play, opening a possible move towards 99.50. However, all that was blown into pieces after latest numbers from American Petroleum Institute (API) reflected a much higher inventories build up than expected. API Inventories grew by 5.9 million barrels last week, much higher than the expected 2.4 million barrels gain. This bearish release pushed prices below the key 98.5 level, with prices quickly accelerating lower – reaching 97.66 before broad bullish sentiment in Asian session halted the drop.
To be fair, prices have been looking tentative around 98.50; bears managed to break the 98.50 level even before the API numbers were released, suggesting that the overall sentiment for WTI wasn’t that great to begin with. This is further corroborated by the fact that the resultant rally during US session yesterday failed to break above the ascending trendline, favoring bearish scenarios which came in the form of the API release.
This bearish bias also fit nicely with fundamental analysis – where global demand of Oil is expected to decline due to slowdown in China and other BRIC countries. Furthermore, in recovering economies such as the Euro-zone, Japan and even US itself, Summer which is traditionally the season for highest manufacturing activity is over. Hence no matter how you look at it, actual demand for energy is heading lower towards the end of the year.
It is not going to be a smooth journey for WTI bears though. Stochastic readings shows that latest bout of bearish pressure has reached Oversold regions, and a bullish pullback becomes much more likely especially given that Asian session right now is broadly bullish. Hence, a slight pullback towards 98.5 key level cannot be ruled out. Nonetheless, if price continue to stay below 98.0 and more importantly below Monday’s low, the possibility of price breaking the soft support of 97.5 and head towards last week’s low of 96.26 increases.
Long term technicals also support some sort of bullish pullback, with Stochastic firmly within the Oversold region and threatening to push higher and form a bullish cycle signal. However, by staying below 98.5, the likelihood of prices pushing towards the ascending trendline increases. Should the trendline be broken, the rally which started back in June 2012 will be invalidated and we could potentially see even stronger acceleration towards 80+ region with interim support found around the low 90s. In such cases, Oversold readings from Stochastic may not be relevant as counter-trend signals from oscillators tend not to perform well when there are strong directional movements.
With Department of Energy (DOE) releasing official crude numbers later today, we could yet see another bearish shock if the build up in inventory is even more than the API numbers. This possibility is real given that API is a privately funded survey and not all companies participate in this survey, unlike the numbers compiled by DOE. Hence the break of the rising trendline seen on the weekly chart is possible given the fundamental and technical bearishness seen. Even in the event of DOE numbers being more bullish than expected, traders should continue to watch the resulting rally and see if prices manage to break 98.5 in the short run. Failure to do so will be an even stronger bearish bias confirmation and we could see even stronger bearish momentum emerging moving forward as bears would be able to sell at a higher price as compared to now.