Crude oil price hits key support as US inventories spike

Crude oil price dropped today after the Energy Information Administration (EIA) released the weekly inventory data. International Brent is trading at $40.60, down more than 1.3% from a day ago while West Texas Intermediate is trading at $38.28.

Crude oil price as US inventories rise

US crude oil inventories rose by 5.7 million barrels a week ago, according to the EIA. This was a surprise to market participants because analysts polled by Bloomberg were expecting the build-up to decline by more than 1.3 million barrels. The US now has about 538.1 million barrels of oil, which is 14 per cent above the 5-year average.

The inventory data came a day after the American Petroleum Institute (API) delivered its report that showed inventories rose by more than 8.4 million barrels a week ago.

Meanwhile, according to the EIA, refiners processed 13.5 million crude oil in the previous week as they operated at 73.1% capacity. At the same time, the US imported about 6.9 million barrels of oil per day, an increase of 700k barrels from the previous week. These imports were 300k more than the past four week’s average.

These numbers show that American producers are still pumping as much oil as they can even after significantly reducing their rigs. According to Baker Hughes, total rig count in the previous week dropped by 17 to 206. In contrast, the number of active rigs in January was more than 670.

Oil supply concerns remain

Investors have been concerned about oil supplies and demand since Monday. This has seen the price drop by more than 7% since Monday.

The decline comes after OPEC+ members agreed to continue slashing about 9.6 million barrels of oil every day until the end of the month. They will then meet in July to decide whether to implement more cuts.

Apart from US inventories, market participants are concerned about the decision by Saudi Arabia to end its voluntary supply cuts. In a statement, oil minister, Prince Abdulaziz said:

“The voluntary cut has served its purpose and we are moving on. A good chunk of what we will increase in July will go into domestic consumption.”

The next big challenge for crude oil price is a return of US shale companies as price increase. As the price fell, many shale companies like Chesapeake Energy and Diamondback started thinking about bankruptcies. At the same time, existing producers slashed their production. Now with oil price surging, there is a possibility that some of them will return to the market.

Most importantly, there is a challenge of global growth. While most countries have started to reopen, there is a likelihood that global growth will remain being sluggish this year. According to the OECD, a club of rich countries, we are now in the worst peace time recession in more than a hundred years. The organisation expects global economy to contract by 6.0%, worse than the World Bank’s estimate of 5.2%. IMF expects the economy to slump by 3%.

Crude oil price technical outlook

On the four-hour chart above, Brent crude oil price is on an upward trend and is being guided by the ascending blue trendline. The price is above the 50-day and 100-day exponential moving average and is slightly below the 61.8% Fibonacci retracement level, which it hit on Monday. Therefore, I expect the price to resume the upward trend, now that it has already hit the important support at $40.