Summary:

• Weekly DOE inventories come in at 4.6M vs 2.8M expected
• Brent Oil hits 5-month high ahead of the release
• 9 months after OPEC cuts begin signs are that supply glut is clearing 

 The weekly DOE crude oil inventories have shown a third consecutive large rise with the recent storm damage in the US clearly having an impact on this release. A rise of 4.6M was more than the consensus forecast for a 2.8M rise and also substantially higher than the 1.4M seen in last night’s API equivalent. 

A closer look at some of the components of the release reveal a less negative view from the perspective of the oil price. The distillate inventory change for instance declined by 5.7M barrels compared to an expected drop of -2.0M whilst the Gasoline inventories also showed a drop roughly inline with expectations at -2.1M  

The price of Brent Oil has seen some downside since the release with the market pulling back from its earlier highs above the $56 handle. Ahead of the release reports of a 116% level of compliance between OPEC and non-OPEC members according to a delegate had seen price hit a 5-month high.

 OECD inventory surplus has seen a pronounced decline this year as the OPEC/non-OPEC supply cuts appear to be working. Source: IEA

However, before the cartel get too carried away and pat themselves on the back for a job well done, it is worth noting what will happen going forward if OPEC keeps their current level of output. 

 However, inventories are expected to rise in Q1 2018 if OPEC maintains the current level of output. Source: IEA 

It is too soon to see whether the initial weakness following the release persists or whether it is simply a pullback. Should the market end the day above $56 then the outlook for bulls becomes far more favourable whereas a rejection at the level would keep the former range in tact.

 A longer term inverse head and shoulders reversal setup could be in play for Brent Oil. Source: xStation

Longer term there could be a major inverse head and shoulders reversal in play with price last week breaking above a possible neckline in the falling trendline from May 2015. This setup isn’t ideal as the falling neckline means that price can remain above the breakout signal even if it drops in the future. Additionally the latest swing high back in last December at around 58.00 lies not far overhead and it is not until the market moves above there that a prolonged run higher may occur.

The outlook remains a little cloudy for this market for now but there are growing signs of optimism for the bulls.