Oil is posting new daily lows for the third time this week and is now seen below the 90$ per barrel level in New York trade as investors are preparing for an increase in crude oil stockpiles. If these forecasts wind up being accurate, analysts will begin to speculate that the build in inventories is coming as a result of slowing demand in the US, which is the largest consumer of oil in the world. Decreases in demand expectations will likely weigh heavily on companies with heavy exposure to the commodity, so expect any further declines to be especially bearish for the stock prices of energy producers.
The front month crude oil futures contract was lower by nearly 1 percent last week, after the American Petroleum Institute released a report showing that inventories increased by 1.35 million barrels. The next major event risk in oil will come with the next report from the Energy Department, with analysts expecting that supplies dropped by 1 million barrels. These expectations are coming in part because of the latest commentary from the International Monetary Fund, which explained that the slowing economy in China could create significant downside risks because too much of the country’s growth comes from foreign investment (rather than in domestic consumer spending).
Prices Holding Below the $90 per Barrel Level
The September contract for crude oil dropped by nearly 70 cents during the latest NYME session, and is now seen holding just above $87.80 after reaching highs of $88.50 yesterday (which is the highest level since the 20th of July). Looking more broadly, prices in crude oil contracts are now 11 percent lower on the year. Fuel consumption in the US was seen 4.4 percent lower than what was seen during the same week last year. Thus far, in 2012, gasoline demand is 4.6 percent lower than the demand seen in 2011.
Looking ahead, the next government data will be the key determinant of whether or not markets will e inspired to take another crack at the psychological $90, so bullish traders should be concerned if we see any surprise increases in total crude oil inventories. In addition to this, CFD traders will also be watching for any new developments in Iran, as there are still possibilities that we will see supply restrictions that could have a bullish impact on price action in the near term.
Looking at the shorter term time frames, Oil has formed a very clear range that has been tested on both sides multiple times. On the topside, resistance is now seen at 89.05, while below prices are likely to find some support at 87.60. Given that prices are showing lower highs on the longer term time frames, it is more likely that a downside break is what will be seen next, but a break of either the range support or resistance is likely to be explosive and trend defining for the medium term.