Crude Lower On Rising US Production

The latest report from the Energy Information Administration this week made for very bearish reading.

The report, covering the week ending September 20^th, showed that US crude inventories jumped a further 2.4 million barrels.

They have now hit 419.5 million barrels, sitting right on the 5-year average for this time of year.

Gasoline Stores Lower

However, the report also showed that US gasoline stores were lower over the week by 0.5 million barrels.

That being said, they are still around 4% higher than the five-year average for this time of year.

Distillate fuel stores also declined, falling by 3 million barrels. Levels are now down to around 7% lower than the 5-year average for this time of year.

US Crude Imports Dip

The breakdown of the report showed an increased supply.

Total products supplied over the last four weeks were up by 1.4% year on year at 21.1 million barrels per day.

Net US crude imports averaged 16.4 million barrels over the week. This was down by nearly 700k barrels from the week before.

Production Rises

Despite the dip in imports, domestic production was higher last week. It averaged 12.5 million barrels per day, up by 100k barrels from the prior week.

This latest increase marked the first surge in production in 3 weeks. It takes US crude production higher by roughly 1.4 million barrels per day year on year.

EIA Forecast Higher Production

The EIA recently upgraded its forecast for US crude production over this year and next.

The EIA now projects 2019 crude production to sit at 12.2 million barrels per day by the end of the year. This is up by 1.2 million barrels per day from the 2018 level.

Looking ahead to next year, the EIA forecasts crude production to rise a further 1 million barrels per day to hit 13.2 million barrels per day.

OPEC Concerned Over Demand Outlook

This higher production outlook from the EIA comes amidst a downward revision to OPEC’s global oil demand outlook.

In its latest update, OPEC said that it projects oil demand globally to fall around 40k barrels per day by the end of the year. This takes the market into a surplus in 2020.

In the report, OPEC said:

“While the outlook for market fundamentals seems somewhat bearish for the rest of the year, given softening economic growth, ongoing global trade issues and slowing oil demand growth, it remains critical to closely monitor the supply/demand balance and assist market stability in the months ahead.”

Trade Ware Remains The Focus Point

OPEC continues to cite the instability from the US/China trade war, and the resulting sluggish economic growth as the key threat to oil demand.

In line with these lower forecasts, the market is expecting the oil-producing cartel to announce further production cuts when it meets again in December.

Unless positive progress can be made within the trade negotiations, it seems that oil will continue on the current downward path.

The US and China are due to resume talks in early October. And while there is a cautious level of optimism around the negotiations, the market is aware of how fragile the situation is.

It will, therefore, be reluctant to buy into anything less than concrete details on a deal.

Technical Perspective

Crude prices are currently testing the 56.66 support formed along a ledge of broken prior highs. The reversal from the bullish channel top has seen price nearly all the way back down to channel support, sitting just below market.

If we break-through here, the next support is down at the 53.79 level. However, this is a very congested area for crude and some consolidation here is likely in the near term. While price holds at this support level, a further rotation higher is still viable with 60.45 the key local resistance level to watch.