HardAssetsInvestor

September 19, 2012

Crude Oil Breaks Support After Massive Inventory Build, Technical Selling

Details

A combination of factors has pushed crude oil to the lowest levels since early August.

The Department of Energy reported this morning that in the week ending Sept.14, U.S. crude oil inventories increased by 8.5 million barrels, gasoline inventories decreased by 1.4 million barrels, distillate inventories decreased by 0.3 million barrels and total petroleum inventories increased by 11.4 million barrels.

Crude oil prices plunged after the latest EIA inventory figures were released, continuing a sell-off that began earlier this week. The decline began on Monday after Brent failed to break through the $117 resistance level.

Bulls had hoped that the Fed’s QE3 announcement in the prior week would be enough to send prices through that mark, but the technical failure, combined with rumors of a release of the Strategic Petroleum Reserve, sent oil tumbling.

Then today, a massive inventory build pushed prices through support near $112, fueling even more technical selling.

“[It is] a classic liquidation move, all technicals for now,” said Mike Guido, head of hedge fund sales at Macquarie.

BRENT

WTI

“People are thinking that maybe the Saudis are going to produce more, and some funds are taking the opportunity to liquidate positions,” added Christopher Bellew of Jefferies Bache.

The next layer of support for Brent stands at $105. A quick snapback in prices could signal that this recent sell-off was overdone, but if prices stay depressed or continue lower, that would indicate the uptrend that began in June may be over.

Regardless, downside should be limited amid global central bank stimulus and the potential for OPEC production cuts should prices fall below the cartel’s target of $100 for Brent.