HardAssetsInvestor

Written by Sumit Roy  |

October 05, 2011

Crude Oil Report: Plunging Inventories Will Spark Crude Oil Rally

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Brent’s ability to hold key support level of $100 positions commodity nicely for future run-up.

The Department of Energy reported this morning that in the week ending Sept. 30, U.S. crude oil inventories decreased by 4.7 million barrels, gasoline inventories decreased by 1.1 million barrels, distillate inventories decreased by 0.7 million barrels and total petroleum inventories decreased by 4.6 million barrels.

Crude oil prices were higher after the latest EIA figures, with Brent near $102/bbl and WTI near $79.

As expected, Brent crude oil prices tested the key $100 support level this week. Continued concerns related to Europe’s sovereign debt crisis was the catalyst. The benchmark ticked as low as $99.11 intraday on Tuesday before rebounding to close at $99.79.

Though it remains to be seen, we expect that crude oil will ultimately hold on and rally from here. Supply and demand fundamentals remain extremely bullish, with inventories now falling swiftly across the globe.

Moreover, selling in financial markets seems to have reached an exhaustion point. The S&P 500 attempted to break its key 1100 support level — and briefly did intraday — but the stock index quickly rebounded to close well above that point.

Analysts at Goldman Sachs agree with this bullish assessment. The firm sees Brent averaging $120 next year, though that is down from their prior $130 forecast.

Meanwhile, Libya’s output hit 300 Kbbl/d, according to Ali Tarhouni, head of the country's oil ministry. That's a big improvement from only a month ago when output was essentially zero amid the civil war in the North African nation.

Turning to this week’s EIA inventory figures, total petroleum inventories in the U.S. decreased by 4.6 mmbbl, against the five-year average of a 4.7 mmbbl build. In turn, the surplus over the five-year average fell to 9.9 mmbbl, or 0.9 percent.