More concerns on near to medium term production and inventory levels are moving through global oil markets as traders look to fresh data to inform price direction.
Globally, the news from OPEC is not constructive for prices, as reports are that current compliance levels with production caps was down below 100% for the latest reporting period, with additional talk of increased production from Libya and Nigeria, two countries that currently do not operate under a cap.
In the domestic US, the weekly report from the American Petroleum Institute (API) only compounded the supply related issues. With the backdrop being a broad expectation for another weekly drop in oil inventories, API shared their data revealed a weekly build of about 1.7 million barrels, and oil turned lower yesterday as a result.
The question for oil traders today centers on what the weekly data released later this morning from the Energy Information Agency (EIA) holds, and what the potential impact on pricing might be. The EIA report is often looked to as the main weekly data event for short term oil traders.
If we take the API release from this week as our guide, we have the potential to see an incremental build in the EIA data, which could extend the downward turn we saw yesterday.
During the first half of this year, the EIA and API have remained well calibrated and show a meaningful week to week correlation.
The correlation roughly equates to 73%, and most importantly for traders looking for insight into possible near-term moves, even when the weekly data does not line up, generally the numbers are still directionally aligned and move in a similar pattern.
In looking at the most recent four-week period, we see even more confirmation in this trend. The weekly difference is roughly .50M barrels.
With this as a basis, we could expect the EIA news today to confirm a build in crude oil inventories. While this has been priced in to some extent now that we have API data, we do see opportunity below the current pricing before we reach support after this latest round of news sinks in. A key wildcard will be gasoline inventories. If we see an increase in crude stocks, but outflows of gasoline, we could see the data basically offset and oil could continue range bound at current levels.
On an hourly chart, we see meaningful resistance in at $46.75, and we have seen a reversal in price at that level over the past 4 days.
We could expect to see that trend continue with news of an inventory build from EIA. For a binary trader, we see potential for positions under $46.75 for a weekly contract, with additional downside moves possible attributable to not only EIA inventory data, but also rig count data from Baker Hughes later in the week and the potential for more noise from OPEC.
Our general preference is for a strategy to trade the volatility heading into larger data releases and to look for risk-reward scenarios that allow for taking multiple positions on either side of current levels expecting larger price swings. However, due to the tight range we have been in, and the risk of an offset in the EIA data with a draw in gasoline inventories which would add additional structure around the current range, we could see more muted volatility this week around what might be a general direction down below $46.75 to finish the week.