Crude oil prices have been falling again in recent days. Brent is now trading below $67 per barrel after having reached north of $71 per barrel in January. WTI has fallen from its high of about $66.50 to trade at $63 today. Last night, the American Petroleum Institute (API) reported a fall in crude stockpiles to the tune of 1.1 million barrels, which couldn’t cause prices to turn higher as the report also revealed a big 4.6 million barrel rise in stocks of distillates.
The official stockpiles report from the Energy Information Administration (EIA) will be released later today. It remains to be seen if this will also show a fall in stockpiles, and if so by how much. Analysts are actually calling for a build of 3.2 million barrels, although they may have revised those views after the publication of the API figures.
In any case, U.S. crude oil production is on the increase and this should help to put a limit to oil prices going forward. The EIA, for one, think that oil production will rise to an average of 10.6 million barrels per day this year, up from its previous estimate of 10.3 million. The U.S. is expected to reach the 11 million bpd production level in the fourth quarter of this year, a year earlier than previously expected. If oil prices were to remain bid, OPEC would have to reduce its production, which is unlikely.
Brent crude oil’s inability to hold above the previous swing high at $65.60, last hit in 2015, is bearish. Brent’s short stay above this level at various points this January means it may have topped out as the breakout buyers were trapped. I can say this more confidently than a few weeks ago, because now we have break in market structure: the last low that led to that fakeout was at $68.30/40. With the price now back below this level and holding below it, it has formed its first couple of lower lows, and a lower high too. At the time of this writing, Brent was testing $66.60 – the opening price level for 2018. If it were to turn red now from being green last month, this would deliver a psychological blow to the bulls.
So, there are increased risks we may see a correction in oil prices in the coming weeks. This view would become invalidated however if Brent manages to go back above the 2015 swing high of $69.60 again, for this would prove many bears wrong. “If resistance was so strong here, why is price refusing to go down?” is the question many bears would be asking themselves in that event. But right now, where we are, I think the chances of a sell-off is greater than a rally, given the recent bearish price action and the above fundamental considerations.