View over oil field in Bakersfiled, California. Image source: alizadastudios © 123RF.com
The current trend of recuperating crude oil prices could be jeopardised by the growing shale sector in the US, whose expansion outpaces the stabilisation between the supply and demand pressures of the broader energy market.
Yesterday, the Energy Information Administration released its newest issue of the Crude Oil Inventories in the US.
The consensus forecasts expected a sizable contraction of 3.2 million barrels; however, the data showed a marked expansion of the reserve by an additional 5.7 million barrels.
US Crude Oil Inventories. Image source: TradingEconomics.com
"U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 5.7 million barrels from the previous week. At 539.2 million barrels, U.S. crude oil inventories are about 18% above the five year average for this time of year."
The period between July and August is typically characterised by low demand for crude due to weak economic activity. This year the situation is especially sensitive because of the pandemic, which continues to weigh down on aggregate demand.
Global demand for oil continues to be quite subdued, and even small ripples in the fragile supply and demand equilibrium could send shockwaves in the broader energy market.
The inventories data from yesterday illustrates these concerns as the supply in the US outpaces the growth in demand. Consequently, crude's tentative bullish run that originated in the wake of the recent slump could be impeded if this trend is allowed to persist.
As can be seen on the 4H chart below, the price of crude oil continues to consolidate around the pivotal 61.8 per cent Fibonacci retracement level at 40.60.
For the time being, the underlying price action fails to advance further north despite having broken out above the resistance. While this behaviour does not necessarily entail an emerging trend reversal, it could manifest potentially growing selling pressure in the market.
If traders weigh in on the recent developments in the energy market as signals for a new major change in the underlying supply and demand equilibrium, this selling pressure could be exacerbated in the following days.
For the time being, the 20-day MA (in orange) threads above the 30-day MA (in blue), which confirms the prevalence of the bullish momentum in the short-term.
However, if the price action falls below the 61.8 per cent Fibonacci retracement with a decisive breakdown, the next support level could be found at the 38.10 price level.
If the expansion of the global oil supply continues to exceed the still moderate growth of aggregate demand, the market could form another bearish correction of 2-4 dollars by the middle of the month.
Crude Oil 4H Price Chart. Image source: Trendsharks ©, created with TradingView.com
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