Glut, Improved Iran Relations Doom Oil Prices
Today’s Spotlight Market
Crude Oil futures are lower ahead of today?s EIA inventory data. Because of the Dr. Martin Luther King Jr. holiday on Monday, the inventory report is being pushed back a day from its traditional Wednesday release. Crude Oil?s price decline to 13-year lows has been a drag on the equity markets after energy stocks took another hit. The energy industry has been suffering the effects of cheaper Oil, which has resulted in decreased investment, layoffs and bankruptcies. The sharp declines in Oil prices has also been a thorn in the side of central banks, who have been attempting to fight off deflationary pressure. The Federal Reserve may delay additional rate increases when the central bank convenes in March. Across the Atlantic, the situation is more dire, as some are predicting that the decline in energy costs could result in inflation dipping into negative territory.
Fundamentals
Traders are expecting an increase of at least 2.3 million barrels last week, according to the consensus estimate. However, yesterday?s API numbers showed an increase of 4.6 million barrels, which suggests the estimate could be on the low side. Despite the large drop in prices, Oil producers have not trimmed production enough to stabilize prices. US Crude Oil production peaked at 9.7 million barrels a day in April when prices were in the 50?s. Production has only fallen to 9.2 million barrels a day, despite prices falling almost 50% since the April peak. China?s economy rose at 6.9% in 2015, which was the slowest pace in 25 years, suggesting prior 2016 demand estimates could be a bit bloated. The past week and a half has shown major progress in US-Iran relations, which could lead to further easing of economic sanctions on Iran. This could lead to more supply at a time where Saudi Arabia and the US show very little sign of slowing production.
Technical Notes? – View Today’s Chart
Turning to the chart, we see March Crude Oil contract steadily declining and breaking through support at the $30 level. Prices have stayed north of the minor support area near 27.00. More significant support can be found the 25.00 level, which could be viewed as critical, as there is only minor support around 22.00 and the last line of defense around 18.00. Crude Oil prices may be able to gain some traction on solid closes above the 35.00 level. Prices are currently below the major moving averages. The RSI indicator remains fairly oversold, closing at 11.05, but it is not unusual for the indicator to fall into single digits in extreme sell-offs.
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