US crude oil benchmark, West Texas Intermediate (WTI) crude oil front-month futures have had a rough start to the year, having slumped to their 13-year lows. Last week, the futures recovered to above $30 a barrel, but Bidness Etc believes it is too early to call a bottom — with further weakness beyond $20 a barrel distinctly possible.
As of last week’s close, WTI futures had lost 13.09% of their value so far this year — having slumped to a low of $26.19 per barrel, levels last seen in September 2013. Cues of a weakening Chinese economy, along with supply concerns, led the weakness exhibited by the benchmark futures year-to-date (YTD).
An excess of supply over demand has led to the weakness in crude oil prices, with the rout having started in June 2014. With prices having slumped to multi-year lows, investors had hoped for a dent in the global supply, which is yet to be seen.
In its latest weekly crude oil report, the US Energy Information Administration (EIA) reported that the US had produced 9.235 million barrels of crude oil during the week that ended January 15. In comparison, the country had pumped out 9.186 million barrels every day around the same time last year, while 9.227 million barrels were produced daily in the earlier week.
The Organization of Petroleum Exporting Countries (OPEC) has refused to support prices by cutting its production rates. In 2014, Saudi Arabia —OPEC’s largest exporting country — was reported to have said that the country would no longer support prices and lose market share in the process.
In accordance to the strategy, OPEC decided in a December 4 meeting held in Vienna that it would not lower its output. Many believe that Saudi Arabia’s refusal to lower production rates is geared toward weeding out shale producers in the US, that produce the commodity at higher costs compared to traditional crude producers. However, that strategy does not seem to be working — as illustrated by the production rates in the US.
Moreover, worries of Iran’s crude oil entering the markets following the sanction lift has taken its toll on crude oil futures. An International Energy Agency (IEA) report had estimated that Iran would increase production rates by 1.5 million barrels a day by the end of 2016, as a result of which the Paris-based group projected prices to remain low for the remainder of the year.
Technical Analysis Point to $18 a Barrel Crude
WTI has registered a decent recovery from its multi-year low of $26.19 per barrel, owing to grossly oversold daily momentum readings. However, it is too early to call a bottom. Technically, the intermediate trend remains bearish below key intermediate to long term averages, indicated by the 50, 100, and 200 day-moving averages, and falling trend line — labeled in red in the technical chart.
In our opinion, a closing break below $30.71 a barrel can expose weakness toward $25.94 per barrel, which may extend down as much as $18.22 a barrel. On the upside, sustained weekly closings above $34.57 a barrel are required to challenge the intermediate down trend line around $38.43 per barrel and reverse the bear trend..
Further weakness in WTI futures means the same for the United States Oil Fund LP (ETF) (NYSEARCA:USO), which tracks the benchmark contract. The exchange traded fund has traded down by 15.73% YTD, due to the weakness exhibited by the crude oil futures.
What’s Going on With Crude Today?
As of 10:11 AM EST today, crude oil futures had once again traded in the red. WTI futures were down by 2.83%, trading at $31.28 per barrel. Tracking this, the United States Oil Fund had lost 2.16% of its value.
The weakness during today’s trade follows a Wall Street Journal report, which suggested that Russia was in the process of ramping up production to levels not seen in the post-Soviet Union era. The country had produced 10.73 million barrels a day during 2015, compared to 10.58 million barrels a day pumped out in the earlier year. The alarming bit has been the increase in production, not only from Russia, but also the US and Saudi Arabia, despite lower prices cutting into profits for some and resulting in losses for others.
Saudi Arabia’s statement regarding crude oil investment added to the rout during today’s trade. The largest crude producing nation in the world said that the national crude oil producer, Saudi Aramco, would not cut its investment plans despite the falling prices. This raises concerns of Saudi Arabia continuing to increase supply of the commodity, driving prices even lower.
In conclusion, Bidness Etc believes that WTI crude has not seen its bottom yet, and further weakness toward $18.22 per barrel is likely. The strength required to break the bear trend is highly unlikely in our opinion, given the fundamentals in the market — with no indication of improvements on the horizon. Hence, we suggest a wait-and-watch approach to investors at current price levels, seeking a bottom between $25.94 and $18.22 per barrel price levels.