Even oil inventories fail to put the brakes on

For oil traders and speculators hitting the sell button has become almost automatic, as the heavily bearish tone for the commodity shows no signs of abating just yet, with another solid move lower yesterday offering low risk trading opportunities once again. Perhaps more importantly yesterday’s wide spread down candle closed below the potential platform of support that had been building in the $76 per barrel region, with the oil trading session ending at $74.21 per barrel having fallen $2.74 on the day. This dramatic move lower was accompanied with high volume at 421k, and merely confirming the heavy selling pressure on the day, with sustained selling continuing overnight and into the London session with oil currently trading at $73.47 per barrel at the time of writing.

Whilst the technical remains very bearish, there is little in the fundamental picture to suggest that we are like to see any meaningful reversal in the short term, and even yesterday’s oil inventory report which delivered a draw in supplies against a forecast of a modest build, failed to offer any support to the beleaguered commodity. In terms of negative news for oil, these are legion. The slowdown in China remains top of the list with the recent factory output suggesting that growth in the second largest economy in the world is continuing to lose momentum and at its weakest in over 20 years, a worrying sign. This weakness was further confirmed by OPEC this week, who are forecasting a fall in demand of approximately 1m barrels a day next year, partly as a result of the economic malaise but also due to the increase in US shale extraction which is now increasing output dramatically in the oil fields of North Dakota and Texas. Coupled with Canada’s oil sands, both are now adding further pressure to oil as extraction from alternative sources continues to expand.

The US dollar too is also adding its own weight to the downwards decline with the technical and fundamental picture for the currency of first reserve remaining strong.

The key date now for oil traders is the 27th November with the next OPEC meeting now on the horizon, and with such a weight of negative sentiment for oil, the only question is when Saudi Arabia will begin to cut supply in order to provide some much needed support for oil and the member states. What is also interesting is the narrowing of the spread between Brent and WTI which has closed to $3 per barrel, down from $6 per barrel of over a week ago.

In the short to medium term the outlook remains heavily bearish and for technical traders, all the immediate support regions have now been breached, with a potential to move to test the lows of 2009 at $64.50 per barrel. However, much will depend on the next OPEC meeting, where the prospect of such a level would set the alarms bells ringing. As always, it will be volume that signals any reversal in sentiment and for any meaningful rally in oil prices, we will need to see a sustained buying climax of some duration if the current trend is to be reversed. For now for oil traders, the sell button remains the one to select, at least in the short term.

By Anna Coulling