HardAssetsInvestor

Written by Sumit Roy  |

September 28, 2011

Crude Oil Report: Can Brent Hold $100 Support Level?

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Whether Brent can hold on to the critical $100 support level is dependent on developments in Europe.

The Department of Energy reported this morning that in the week ending Sept. 23, U.S. crude oil inventories increased by 1.9 million barrels, gasoline inventories increased by 0.8 million barrels, distillate inventories increased by 0.1 million barrels and total petroleum inventories increased by 1.1 million barrels.

Crude oil prices were lower after the latest EIA figures, with Brent near $105/bbl and WTI near $82.

This past week was a brutal one for commodities and oil was no exception. Prices for both Brent and WTI fell precipitously to multiweek lows. But on closer on inspection, crude has actually held up remarkably well given the performance of other commodities. Copper hit the lowest level in 14 months; silver reached a 10-month low and soybeans hit a 10-month low as well.

But take the oil benchmark Brent, which fell as low as $101.66 earlier this week. That was only a one-month low. Prices are thus far managing to hold above a critical support level near $100.

It all comes down to supply and demand. Despite persistently high prices — Brent has maintained itself above $100 for seven months and counting, the longest it has held above that price in history — demand has remained resilient. The IEA sees growth of 1 mmbbl/d this year.

Meanwhile, non-OPEC supply is anticipated to grow only 0.2 mmbbl/d this year. That puts the burden on OPEC to close the gap. Add in the 1.55 mmbbl/d of supply offline in Libya and the gap grows that much wider.

The IEA’s release of 60 million barrels of strategic reserves over approximately two months (or 1 mmbbl/d) helped close the some of the supply gap left by weak non-OPEC growth and the disruptions in Libya. But with those sales now over, inventories have begun to fall notably.

In turn, crude oil prices have performed relatively well in a very dismal environment for commodities.

But speculation is growing that the macroeconomic woes that have plagued the U.S. and Europe could spread to the rest of the world. If these fears intensify, that could push crude through the $100 mark, which would likely spur aggressive technical selling.

Right now, all eyes are on European policymakers. The hope is that new measures to combat the sovereign debt crisis in the region will be unveiled. If these new measures assuage the market, crude could bounce significantly from here. But if markets are not satisfied, and stocks and other commodities begin to tumble, crude will likely tumble as well.

Turning to this week’s EIA inventory figures, total petroleum inventories in the U.S. decreased by 1.1 mmbbl, against the five-year average of a 1 mmbbl build. In turn, the surplus over the five-year average increased slightly to 19.3 mmbbl, or 1.8 percent.