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Market Analysis

Fundamental Analysis: Oil Drops as Supply Spikes

May 23, 2019
BY Michael Stark

American light oil has made an even bigger loss today, over 4% since the Asian open. The movement came mainly as a result of surprisingly high stocks. The other main negative for crude recently was the likely effect of trade tensions on demand.

USOIL fell sharply in the late morning and early afternoon GMT below the key area of $60 per barrel. $58.62 per barrel at the time of writing is a low of about two months. So far, this is crude oil’s worst weekly performance since November 2018.

Shock gain in inventories and weaker outlook for demand

Yesterday’s regular release of crude oil inventories from the USA was very negative for oil. The Energy Information Administration’s data indicated that stocks of crude increased by about 4.7 million barrels last week. This figure came against the expectation for a decline of slightly more than half a million. Total stock was at its highest in nearly two years.

This data drove sudden losses in the price of USOIL, but it has also been compounded by issues with demand. The Sino-American trade conflict has significant implications for oil because China is the world’s largest importer and second largest consumer of crude. Prospects for Chinese growth remain fairly weak amid the ongoing war of words between Donald Trump and leaders in Beijing.

The overall ‘risk-off’ mood over the last few days has also contributed to oil’s fall. Losses for many prominent indices around the world and gains for havens have been accompanied by crude’s downward movement. The very high volatility of USOIL versus most symbols other than cryptocurrencies means that it tends to react badly when sentiment flips to negative.

Traders watch rig count and OPEC

The next important data for USOIL is the USA’s Baker Hughes rig count tomorrow at 17.00 GMT. Last week the figure was down very slightly to 802; a further decrease could provide limited support to prices.

News from OPEC+ and energy ministers of Gulf countries in particular could affect trading into next week. The cartel and its allies including Russia aren’t due to decide again on output until June. However, hints at further cuts to supply could be somewhat positive for oil.

Fundamentals suggest more losses for USOIL

The fundamental picture overall is very negative for crude oil and could remain this way until the end of the week. Conversely, there is a great variety of factors which affect the price of USOIL. This means that using fundamentals alone to determine direction after movements like today’s would be very unwise.

Traders should focus more on technicals and particularly key closing levels like $60 and $59. A consolidation below these could signal more losses, but probably not on the same scale as today.

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