WTI Crude – Lesser and Lesser Inventories but 106.5 holds

Inventories level took yet another bearish turn yesterday, with US Department of Energy report showing that Crude Oil Inventories have shrunk by 6.9 million barrels for the week of 12th July, almost 5 million barrels more than the expected 2 million decline. This is the 3rd week in a row that Inventories levels are below expectations. Since 2010, we’ve only seen such 3 or more consecutive sequences 8 times, highlighting the rarity of such incidents. To add further icing on the cake, current sequence sums up to almost 20 million barrels short of expected inventories levels, compared to the averaged 9 million barrels combined for the 8 individual sequences. Current sequence managed to trump the longest 6 weeks sequence which only accounted for 10.4 million barrels worth of under-expectation, while the next highest volumetric sequence stands at 15.3 million barrels, which happened almost one year ago back on 1st Aug to 22nd Aug.

Certainly it is clear that crude oil inventories is dropping like a stone. Whether this decline is due to a bottleneck in supply or an increase in demand, it shouldn’t matter as the underlying fact remains – less stock = higher prices. However, this extremely bullish inventory numbers failed to rally WTI Crude to new highs, with 106.5 stubbornly refused to budge. Coupled with the fact that risk appetite is strong yesterday due to Ben Bernanke’s dovish statements, we are forced to admit that perhaps offers are abundant above 106.50, which makes it such an impenetrable resistance.

There may be some other fundamental reasons why the rally is so lack luster. Other than the declining crude oil inventories, all other inventories are actually building up – Gasoline inventories rose by 3 million barrels versus expected 1.5 million fall, while Distillate rose by 3.9 million barrels when expectations were calling for a 1.5 million increase. Refinery Utilization actually improved by 0.40% when the expectations called for a -0.40% decline. It seems that the inventory down the Oil products pipeline is piling up, which will eventually affect upstream product inventories, demand, and hence prices. There is a likelihood that downstream refineries and wholesalers have bought too much crude in the past 2-3 weeks, which resulted in the sharp decline in Crude. But with them unable to clear their inventories, it is unlikely that current purple patch will continue for long. Traders being a forward looking bunch, understandably would price in this scenario as well, hence explaining in part why 106.50 stayed strong.

Hourly Chart

From a technical perspective, price is being squeezed into the apex of current triangle. Something gotta give eventually, and we could see price either breaking 106.50 convincingly, or breaking the rising trendline to open up 104.0 support once more. Stochastic readings are pointing lower now, and we’re in the midst of a bearish cycle. If stochastic readings proved to be correct, prices have a higher likelihood of heading lower from here.

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