On Wednesday, crude oil lost 1% and dropped to a new monthly low of $96.16, tumbling for a third straight session on pressure from surging stockpiles. The price of light crude accelerated declines after a government report showed that U.S. oil supplies rose more-than-expected in the week ended Oct. 18. Crude oil has dropped more than 5% in five sessions, reaching below $97 a barrel for the first time since July. Yesterday, light crude hit its lowest level since July 1.

The U.S. Energy Information Administration said in its weekly report that U.S. crude oil inventories rose by 5.2 million barrels in the week ended Oct. 18, above expectations for an increase of 3 million barrels, stoking concerns the country is awash in crude. Total U.S. crude oil inventories stood at 379.8 million barrels, the highest level since June. According to data from the EIA, total U.S. crude oil stockpiles have risen by 24 million barrels since mid-September as some 1.3 million barrels per day (bpd) of refining capacity has been taken offline.

Please note that refinery run rates have dropped by some 6.6% in the last six weeks due to seasonal maintenance, curbing crude demand for the moment.

Once we know the major factor which had a significant impact on light crude, let’s move on to the technical changes in the crude oil market. Yesterday, after the open, oil bulls didn’t manage to push the price above the previously-broken lower border of the declining trend channel (based on the Sept. 3 and Sept. 30 lows). This weakness encouraged sellers to act. Crude oil quickly slipped below the Tuesday low which fueled further declines. With this downward move light crude dropped to its daily low of $96.16 and almost reached the 61.8% Fibonacci retracement level based on the entire April-August rally.

At this point, we’ll bring up our previous Oil Trading Alert. As we wrote yesterday:

(…) the breakdown is unconfirmed at the moment. Additionally, we should keep in mind the medium-term picture. Yesterday, light crude extended declines and it almost reached a strong support zone based on the 50-week moving average (currently close to $97) and the previously-broken neck level of the reverse head and shoulders formation.

Although crude oil broke below the above-mentioned strong support zone (only on an intraday basis) it closed Wednesday slightly above this level. Therefore, it still serves as support.

Please note that yesterday the daily RSI dropped to its lowest level since April. Back then, such a low value of the indicator had a positive impact on light crude. After the RSI moved to the 30 level, we saw a pullback in the following days. If history repeats itself, we may see similar price action in the near future.

Before we summarize, we want to focus on the XOI once again. 

In our previous Oil Trading Alert, we wrote that the XOI broke above the 78.6% (close to 1,467) Fibonacci retracement level based on the entire May-October 2008 decline, but the breakout was unconfirmed. Yesterday, this strong resistance level stopped further increases and encouraged investors to take profits after the recent rally. The XOI lost 1.23% and slipped below 1,450. Please note that the nearest support zone (1,428-1,430) is based on the May and September highs. 

Quoting our Monday’s Oil Investment Update:

(…) in the previous week, crude oil was clearly weaker in relation to oil stocks and strong negative correlation between light crude and the oil index was even more visible than earlier this month. (…)it seems that lower prices of crude oil may be accompanied by higher values of the oil index. However, we should keep in mind that oil stocks reached a very strong resistance zone and light crude dropped to important support, which may result in a reversal of the current trend. 

Taking the above facts into account, it seems that oil stocks will stop outperforming oil at least temporarily quite soon. We also think that at the same time we may see further declines in oil stocks and a pullback in crude oil if the recent correlation between oil stocks and light crude remains in place.

Summing up, light crude dropped to a strong support zone (only on an intradyay basis) based on the 50-week moving average and the previously-broken neck level of the reverse head and shoulders formation. This area is also reinforced by the 61.8% Fibonacci retracement level based on the entire April-August rally. Additionally, the daily RSI dropped  to the 30 level. Taking all these facts into account we may see a pullback in the following days.

Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: mixed
LT outlook: bullish

Trading position (short-term): Although we are considering opening speculative short positions, we do not suggest opening them just yet. Taking into account the medium-term picture, the situation is still unclear.

Thank you.

Nadia Simmons
Sunshine Profits' Crude Oil Expert
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