Article / 11 August 2016 at 8:42 GMT

Oil looking for support after inventory selloff

Head of Commodity Strategy / Saxo Bank
  • Crude sells off on inventories gain
  • US stocks rose by one million barrels
  • Traders should exercise caution at current levels

Inventories rise
Crude is piling up at Cushing and the recent oil rally is fading into the past. Photo: iStock 

By Ole Hansen

Crude oil sold off following the weekly inventory report yesterday. The weekly inventory rise of one million barrels was not what the market was looking for, and came at a time when production from Saudi Arabia, Kuwait, the UAE, and Iran continues to rise. 

In its monthly report released today, the IEA was a bit more upbeat on the rebalancing process, despite record Gulf production, compared with earlier reports this week from both the EIA and Opec. Citing the report Reuters wrote that "oil markets will begin to tighten already during the second half of 2016 but process will be slow and painful as global demand growth declines and non-Opec supplies rebound".

A hefty draw in stocks in Q3 should begin to reduce the current overhang of supplies, says the IEA. During June the organisation said that OECD inventories had risen by 5.7 million barrels to a new record of 3,093 billion barrels.

US inventories nevertheless rose by 1m barrels last week as refinery demand slowed. Inventories at Cushing – the delivery hub for WTI crude oil – jumped by a counter-seasonal 1,2 million barrels, further widening the gap to longer-term averages. 

DOE data

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Source: Saxo Bank 
These developments on inventories and Gulf-region production has oil back on the defensive. As the charts below show, the recovery from the lows last week both stopped once hitting the 38.2% retracement of the post Brexit selloff. 

Having turned lower, support is now sought at $43.64/barrel on October Brent with a break below $43.14/n signaling a possible return to the recent low.

Brent Crude Oil

Source: Saxo Bank 

Same outlook for September WTI crude which only has its $40.84/b support to keep the price from attempting a move back to the recent lows. 

WTI Crude oil
Source: Saxo Bank 
It goes without saying that potential buyers at this stage should probably be patient and not get to aggressively involved unless we see oil make a break above the aforementioned levels where it was rejected earlier in the week.

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank


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