Oil drops after smaller DOE drawdown

The most recent oil inventory release has shown a smaller than expected drop for the past week, with the market falling lower in the initial reaction. A print of -1.4M was well below the 3.8M seen last time out, but compared to the consensus forecast of -2.2M it is relatively higher. Last night’s private API release also may have lowered expectations, after it showed a drawdown of 6m barrels and looking just at the headline figure it is readily apparent why the immediate move has been lower.

Looking more closely at the components reveals further reasons why the release could be seen as negative for the oil price with the Gasoline number in particular an adverse print. The components are listed below in the form of actual vs expected unless otherwise stated:

Gasoline: +2.9M vs -1.9M

Distillates: +1.2M vs +0.8M

US production: 10.8M vs 10.9M prior

Despite today’s smaller than expected draw, the big picture as far as inventories are concerned remains fairly supportive of the crude price. If we compare the year so far with the past 5 and base each line on the below chart at 100 from the beginning of the year, it is quite clear that 2018 has been unusually low. This alone is seen as positive for the price of oil as lower supply translates into higher prices and even though today’s print showed a higher than expected reading, it was still a drawdown nonetheless.

Despite today's smaller than expected drawdown, the reading represented another decline and compared to the past 5 years the inventory level in 2018 remains relatively far lower. Source: XTB Macrobond

Turning our attention to the charts, as mentioned above the initial reaction has been to the downside with Oil dropping more than 80 ticks in the half hour following the release. In doing so the market as dropped back below the Ichimoku cloud on H1 which could be seen to suggest the shorter term trend has turned lower.

Oil has fallen below the H1 cloud since the release as the market reacts negatively to a smaller than expected drawdown. Source: xStation

The long term chart remains a little less clear and while price has moved below the cloud on D1 also, it has yet to be full confirmed by the lagging line - although this could be about to happen. The region around 70.50 may still be seen as longer term support however, and unless this breaks then the downside is fairly limited in the grand scheme of things.

The longer term picture remains a little mixed for crude, with the market dropping below the cloud on D1 but the breakout level from 70.50 remains potentially important support. Source: xStation