Oil Recovers from Two-Month Low as US Inventories Continue to Decline

WTI crude oil held on to its minor overnight gains but remained capped below $46.00 handle during European trading session on Thursday.

On Wednesday, oil pared early losses to a two-month low level and turned higher after the latest report by the US Energy Information Administration (EIA) showed a ninth consecutive decline in domestic crude stockpiles by (more-than-expected) 2.3 million barrels for the week ended July 15. The drawdown in inventories matched the decline of 2.3 million barrels reported by the American Petroleum Institute (API) late Tuesday. The EIA report also showed a surprising fall in distillates by 200,000 barrels.

However, growing gasoline supplies, by 900,000 barrels, kept prices under pressure check on speculation that it might lead to rise in crude inventory levels if refiners start to cut back on production. Nevertheless, Wednesday’s report eased concerns of a global supply glut and provides the much needed respite for oil traders.

Some experts believe that the data is not as bullish as the headline number indicated as the total inventories has jumped to yet another new all-time record level. Total domestic crude oil production rose by 9,000 barrels to 8.494 million barrels a day, reflecting a very well supplied global market.

Analysts’ also remained skeptic over the sustainability of the recent bullish traction as oil demand might not be able to outpace the production growth in Iraq and Iran. Meanwhile, a sharp drop in the war-torn nation of Libya’s oil production to just a fraction of what it was in 2010 provides some hopes for traders hoping for an oil price rally.

Technical update

On the immediate upside, bulls would be aiming to conquer $46.00 handle, above which the bullish momentum is likely to get extended immediately towards 50-day SMA resistance around $46.80-90 region. This $46.80-90 resistance also coincides with two-week highs and hence, a subsequent buying interest above this important resistance now seems to pave way for continuation of the commodity’s near-term upward trajectory towards its next major resistance near $48.50 level.

Alternatively, weakness back below $45.60-50 immediate support, and a subsequent break below $45.00 strong support area, is likely to drag oil back towards the very important 200-day SMA support near $44.00 region. A convincing break below $44.00 handle now seems to open room for continuation of the depreciating move, initially towards $42.85-80 intermediate support and eventually towards its next major support near $41.50 level.