We saw a strong continuation of the drop in oil prices yesterday after having initially broken the daily 200 sma on both Friday and Monday over the partial May Day holiday extended weekend.
As far as I can find out the drop yesterday started as hedge fund and money managers began seriously closing out long positions after prices dipped below last week’s lows. Apparently, over 50,000 US contracts traded within five minutes.
The tone was already in a negative state following the further increase in the U.S. rig count last Friday, indicating that U.S. oil production could even exceed levels last seen in 1970, and increasing convictions that the excessive global oil inventories are not reducing anything like OPEC intended with its production cut agreement.
There is also growing skepticism that even though OPEC/NOPEC will agree to extend the cuts until the year end in its meeting in a few weeks time, it still may not reduce inventories sufficiently to cause prices to increase noticeably. Also, there are doubts whether OPEC will be able to continue to maintain such a high level of compliance with the agreement amongst its members during the second half of the year.
Once yesterday’s fall had put in what turned out to be the low for the day, this week’s API report was released showing a significant draw of 4.2 mill barrels in United States crude oil inventories, compared to analyst expectations of a 2.2 mill barrels draw. This caused some small rebound in price and maybe saved the price dropping to new lows for the year.
Gasoline inventories also fell by 1.9 mill barrels, according to the API, compared with the analysts’ prediction of a 1 mill build in gasoline stocks. But this, again, did not result in a significant price rise - afterall, recent EIA, gasoline statistics have shown an increase in gasoline inventories of nearly 5 mill barrels in the last few weeks.
Today, we have the EIA’s version of the weekly crude oil and gasoline inventories, which can often deviate from the figures previously reported by the API…
Here is the Hourly chart showing the action around the 200sma before and after the weekend, and the breakdown yesterday.