Falling Crude Prices Threaten Oil Recovery

Chart of U.S. Crude Oil Futures - Falling Crude Prices Threaten Oil Recovery
Chart of U.S. Crude Oil Futures – Falling Crude Prices Threaten Oil Recovery – Source: TheTechnicals.com and TradingView

U.S. crude oil futures fell sharply again on Thursday as it became apparent that supplies may not be tightening as much as previously feared. Wednesday’s report from the Energy Information Administration revealed that U.S. crude oil inventories increased by a whopping 9.9M barrels last week, a level not seen since November. This was against a previous consensus forecast of only 1.3M barrels. In fact, crude stock increases in five of the past six weeks have far exceeded expectations, pointing to abundant supply and pressuring prices.

Factors Leading to Rise in Crude Oil Prices

In contrast, developments in recent months and weeks have served to boost the price of crude oil, primarily by pressuring supply. The main factor has revolved around OPEC countries and their allies voluntarily limiting output for the past several months in efforts to stabilize oil prices.

Also, the U.S. government has recently renewed economic sanctions on major oil producer, Iran. This has further weighed on global oil supply. On Thursday, the U.S. ceased providing waivers to certain high-demand countries, like India and China, which previously allowed them to buy oil from Iran despite the sanctions. President Trump has said that other producers, most notably Saudi Arabia, will likely fill the Iranian oil gap. And refineries in Asia have reportedly begun asking the Saudis to increase production accordingly.

Another major oil producer, Venezuela, is currently embroiled in an ongoing political crisis revolving around its socialist leader, Nicolas Maduro. As a result, the U.S. has recently begun to institute sanctions on Venezuela. These sanctions have severely choked off the country’s oil export revenue and further diminished global supply sources.

What May Happen Next for Crude Oil?

Despite all of these potentially price-boosting conditions, however, sharply rising crude stockpiles are telling a different story. These rising inventories have begun to weigh heavily on the bullish recovery trend for crude oil that has been in place since late December.

On Thursday, the price of U.S. crude oil dropped down to touch the close convergence of its 200-day and 50-day moving averages. This constitutes a key support level for the current uptrend. Any major breakdown below this support could mark a potential downside trend reversal towards the next major support level around $55.00.

IMPORTANT: The information above should not be construed as investment advice and should not be considered as a solicitation to buy or sell securities. Trading and investing in the financial markets involves substantial risk of loss, and may not be suitable for all investors. 

Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock may be mentioned.

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