The short term rally for crude oil came to a shuddering halt last night, as two items of fundamental news helped to push the commodity lower once again, reversing most of the gains of the last two days. The first was the weekly oil inventories, which came in at an eye watering build of 10.8mbbls, crushing the forecast of 3.3mbbls by a country mile! The build in inventories is now so extreme that even the recent increase in price by OPEC to the Asian market has failed to maintain the rally of the last few days.
This saw oil touch a session high of $54.13 per barrel Tuesday, before yesterday’s gapped down open saw the market move back below the deep level of price resistance in the $53 per barrel area, before collapsing under the weight of the news release to trade at $50.89 per barrel at the time of writing. Yesterday’s build in inventories was the largest this year, and the thirteenth consecutive week of increasing stockpiles of the commodity, reinforcing once again that the market is currently awash with oil, with only Asia showing an increase in demand at present.
The second shock wave followed shortly after, with the release of the FOMC minutes. The board once again confirmed its commitment to a rise in interest rates with a possible hike in June still on the agenda. This despite last Friday’s dire NFP numbers. As a result, the dollar index rallied on the news, sending oil and other commodities sharply lower.
From a technical perspective, the longer term outlook for oil still remains bearish, and given the support now bestowed on the US dollar by the Fed, coupled with the dramatic increase in supply, we may now see oil move lower with momentum, back to test the two platforms of support immediately below. The first of these is just below the $50 per barrel area, with the second at $46.80 per barrel. If the first of these is breached, then we can expect a test of this second support platform. If this is pierced, then a test of the $44 per barrel price point will follow.
Moreover, what is perhaps the most interesting aspect of the chart is the volume associated with Tuesday’s up candle. Whilst the price action of the candle was relatively wide, the volume was extreme, and on such volumes we would have expected a much wider spread on the candle. This suggested selling and potential weakness ahead, which has duly been confirmed by yesterday’s price action. The ceiling of resistance is now firmly in place in the $54 per barrel region, a level tested back in March, and which was the trigger for the decline to $44 per barrel. Given the technical and fundamental forces now combining, it looks like the stage is set for a repeat performance.