For the week ended March 2, oil prices closed down more than 3%, as did two major oil-related exchange-traded funds (ETFs), the iPath Goldman Sachs Crude Oil Total Return (OIL) and United States Oil (USO), down 4.1% and 3.13%, respectively.

Traders were particularly fixed on this week’s official oil inventory figures, as the American Petroleum Institute (API) on Tuesday reported an increase in U.S. crude oil available in storage, at 933,000  barrels. This was less than the 2.7 million barrels the market expected but still a rise that put pressure on prices.

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This was followed the next day by official data from the U.S. Energy Information Administration (EIA) showing domestic crude supplies rose by 3 million barrels for the week ended Feb. 23. Analysts polled by S&P Global Platts expected the EIA to report a weekly climb of 2.1 million barrels.

Adding to the pressure on crude prices for the week were gasoline stockpiles that rose by 2.5 million barrels for the week. The S&P Global Platts survey forecast a gasoline supply decline of 200,000 barrels.

Crude Oil Supply Side Dynamics in Focus

Traders are concentrating on the supply side of the market, worried that crude oil production could come back on line faster than anticipated as oil prices increase, especially in the U.S. The International Energy Agency (IEA) now thinks that the U.S. could become the world’s largest oil producer as early as this year, beating Russia by producing more than 11 million barrels per day.

Adding to the supply concern is a report that Saudi Arabia voiced its desire to relax production curbs in 2019 without disturbing the market. Saudi led OPEC and Russia to agree to cut oil production by 1.8 million barrels per day when oil prices turned down in 2014. This has been an effective strategy to boost oil prices because of the widespread participation. For example, Russia’s Energy ministry reported this week that January 2018 oil production is down 1.4% from this time last year, and exports are down 2.1% in the same period.

Saudi is keen to figure out a way to take advantage of higher oil prices by increasing production without inadvertently pushing prices lower. Other OPEC producers want in on the action too. Iraq is looking to increase production to 5 million barrels a day and Ecuadorian Oil Minister Carlos Perez is said to be in talks with OPEC to add new crude production this year despite the current curtailment agreement.

If the OPEC-Russia production agreement dissolves in a disorderly fashion before it expires at the end of 2018, oil supplies could come back to the market faster than anticipated and reignite the supply glut that drove prices down in the first place.

OPEC Goes to Houston

This week kicks off the CERAWeek energy conference in Houston, Texas, and press reports suggest OPEC will host a dinner on Monday night with U.S. oil shale producing firms. One topic that could be on the table is how best to manage rising U.S. production to prevent a return of the oil glut that caused prices to fall rapidly in 2015 and 2016.  With the IEA suggesting that the U.S. could top Russia as the world’s largest oil producer, it is logical that OPEC would want the U.S. shale industry to have a seat at the pricing-discussion table.

OPEC is quite concerned about managing the supply picture in a bid to keep oil prices up. The cartel faced off against the U.S. shale industry in 2014 by keeping the taps open and allowing a crude oil glut to build. Saudi Arabia specifically said at the time that it was not prepared to curtail its own production and allow U.S. shale producers to fill in the gap. The aim was to drive prices down and push U.S. shale producers into bankruptcy.

This strategy worked to some extent as many shale companies went broke, but the fiscal pain became too great for Saudi Arabia, and they worked with other OPEC members and Russia to take supplies off the market to support prices. This time they want to make sure the U.S. shale industry is part of the solution.

Technically Oil Looks Bearish

Technical indicators this week provided by Investing.com show an emerging bearish consensus on a daily price chart with 8 out of 12 moving average indicators and 6 out of 6 technical indicators suggesting prices could go lower. Additionally, on Feb. 27, oil entered an engulfing bearish pattern on the daily chart, which indicates a bearish reversal. This signifies that the uptrend has been hurt and the bears may be gaining strength.

Looking at the daily chart, WTI crude oil is trading below its 21-day and 55-day exponential moving average. A cross of the 21-day of the 55-day would also be a bearish signal. The Moving Average Convergence Divergence (MACD) chart shows the fast line in blue trading below zero, which is also viewed as a bearish market signal.

 

Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment advice. Gary does not own the USO or OIL ETFs.

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