West Texas Intermediate has rallied after hitting a five-month low of $93.07 per barrel going into the weekly supply report from the Energy Information Administration tomorrow. Analysts forecast a surplus of 1.7 million barrels; but over the last five months, crude stockpiles has risen well above estimates signaling confusion over crude supply and demand. Inventories have risen for the seventh consecutive week.
“The EIA reports over the last few weeks have outperformed analyst estimates, and I wouldn’t be surprised if that happens again tomorrow,” said Bob Yawger, director of the futures division at Mizuho Securities.
WTI crude is declining due to the optimism of reduced quantitative easing in the near future, stronger dollar, and a resurgence in a lack of growth in the eurozone, as well. Refinery demand also fell in October as the United States continues to push record output levels.
It is unlikely the supply and demand of crude will tighten anytime soon going into the winter months. WTI crude declined 5.8 percent in October alone, and it is likely to break $90 per barrel. Addison Armstrong of Tradition Energy notes that “the U.S. is swimming in oil right now, and there’s been no sign of a pickup in seasonal demand.” The pool of U.S. oil has increased nearly eight million barrels per day.
I don’t see prices sliding to $90 anytime soon because the market is so oversold,” Yawger said. He also referred to the oversold condition in the RSI. Currently, the RSI for crude on the daily chart is just under 28, but it has been trending below 40 for several sessions. Given the oversold nature of WTI crude, there “should” be a short-term bounce higher, but it does not necessarily mean there will be. It will be important to see what the EIA supply report tells us.
A short oversold rally could happen to retest $94.82, but the fundamentals of crude is pointing to which direction it will continue to drift. Targets of $100, $96.77 and $94.15 have been surpassed. I expect further downside to the 78.6 percent Fibonacci retracement of this year’s low will create an area of demand near $90 to $90.25. However, if the supply data continues to fight against crude’s oversold condition, sub-$90 is likely by January 2014.