Crude Oil Retreats after Retesting $50.00

WTI crude oil eased on Thursday, giving up some of its gains posted in the past two days and extending its reversal from $50.00 psychological mark touched on Wednesday. Edging lower, oil fell around 1% to currently trade a tad below $49.50 level.

Thursday’s retracement is followed after a strong rally on Wednesday when the commodity rose to $50.00/barrel mark after the official EIA report showed a larger than expected drawdown in the US crude stockpiles. For the week ended June 24, US crude oil inventories fell by 4.1 million barrels to 526.6 million barrels, recording a sixth consecutive week of decline in domestic crude supplies. Earlier on Tuesday, the American Petroleum Institute (API) had also reported a larger-than-expected drop of 3.9 million-barrel as against expected decline of 2.4 million barrels.

The EIA report also revealed that total production decline by 55,000 barrels to 8.622 million barrels, marking a third week straight week of fall in output. However, given the rise in the number of oil rig counts in the recent weeks, the production might begin to rise. Expectation of elevated US crude oil production, which had been a key drive of the two-year slump in oil prices, might cap any further sharp appreciation and could even force oil prices to retreat.

Traders might also be inclined to take some profits off the table as we near the end of the week. Moreover, as we near the end of second quarter traders would be looking to square off their positions and lock-in some profits after a sharp rally of nearly 8% from sub-$46.00 level touched at the beginning of the week. Adding to the already weak sentiment surrounding oil prices on Thursday, Goldman Sachs said that risks for oil prices to fall in the second-half of 2016 have increased following a ceasefire between militants and the government in OPEC member Nigeria.

Meanwhile, in wake of last week’s historic referendum in the UK to end its membership with the European Union, a majority of economists now anticipate additional monetary stimulus to be announced by the Bank of England, which might extend some support to riskier assets, including commodities – like oil.

However, uncertainty surrounding the economic implication of the Brexit might lead to a weaker economic growth and reduce oil demand that further diminish prospects of any sharp near-term appreciation in oil prices.

Technical outlook

From current levels, the commodity is likely to take immediate support around $49.00 handle, which if broken should continue dragging it back towards $48.10-$48.00 horizontal support area. Decisive weakness below $48.00 handle might now negate any further bullish momentum and could drag the commodity back below $47.00 level towards testing $46.50 support area.

On the flip side, the commodity needs to sustain its strength above $50.00 psychological mark, which if conquered seems to assist it back towards early June closing high resistance near $51.45-50 region.