Summary:

• DOE inventories -5.1M vs -3.6M exp and -5.6M prior
• US production rises to new record high of 9.8M
• Oil.WTI could be set for a sell-off with positioning still in favour of a decline

The weekly DOE crude oil inventories have shown a larger than expected draw, but the reading was still above that seen in last night’s API. A headline reading of -5.1M is below the -3.6M taken as a consensus forecast and a little higher than the -5.6M seen last time out. Last night’s API showed a print of -7.4M and against this today’s number doesn’t look so low. 

The decline is the fourth in a row and there has been a prolonged drop on the whole seen in US inventories since they peaked earlier this year. On a annual comparison basis the current level of inventories last week fell below the equivalent in 2015 having dropped below last year’s in the summer. 

 US Oil inventories have continued to decline with the latest release seeing the current year’s inventory drop further below the equivalent time of year in 2015. Source: XTB Macrobond

Inventories have traditionally had an inverse correlation to the oil price with lower inventories suggesting either greater demand or lower supply and therefore seen as positive for the Oil price. The chart below reflects this with the inventory level inverted on the left hand axis and the price of Oil.WTI shown on the right. You can also note that these are pretty much in line at present.  

 US inventories have historically enjoyed a fairly strong inverse relationship with the price of oil as shown by Oil.WTI. Source: XTB Macrobond

Whilst what we’ve mentioned so far appears fairly supportive of the oil price the latest production figures form the US are clearly negative. An increase of 73k barrels per day is obviously small but it represents an increase nonetheless and has seen the current  production levels ramp higher to a record peak. 

 US oil production moved higher again showing that shale production is increasing. Source: XTB Macrobond

In terms of market reaction, Oil.WTI briefly popped higher on the drawdown but the market has since reversed and made a new low on the week. The price has dropped below the $57 handle and is threatening to move back below the 21 period EMA on D1. This could be seen as an early indication of a trend change but traders would like to see a negative cross (8 falling below 21) to provide further evidence for it. 

 Oil.WTI could be set for a pullback after reacting negatively to the DOE report. Source: xStation

As long as the market remains below the 59.00 level then a pullback may occur with Fib retracements providing possible targets for shorts. The 23.6% at 55.03 would be the first level to look to but a break below there could see the 38.2% at 52.58 hit. Also keep in mind that the latest COT positioning data shows an extreme level of longs and this could see price unwind more quickly should a sell-of begin.