Oil Trades Lower Ahead of EIA Inventory Report

WTI crude oil backed-off a bit on Wednesday but held $46.00 mark as traders trim their exposure to lock-in some profits following Tuesday’s sharp recovery, led by short-covering from two-month low touched in the previous trading session.

Wednesday’s decline could also be attributed to a possible rise in US crude oil supplies, which might reignite worries of a possible global supply glut that caused oil price slump since mid-2014. Moreover, cautious trade across global equity markets and a broadly stronger US Dollar kept oil traders on the back-foot.

On Tuesday, the commodity surged and settled with a gain of over 4% as risk-on rally across global equity markets added to the upbeat investor sentiment. The US Dollar also ticked lower, boosting demand for dollar-denominated commodities – like oil.

Adding to the upbeat sentiment around oil, a report issued by the Organization of the Petroleum Exporting Countries (OPEC) showed non-OPEC production could drop anywhere between 800,000 to 900,000 barrels a day to 56 million barrels. The report expected global demand to remain broadly unchanged at around 1.2 million barrels a day.

The cartel, however, raised concerns that oil demand faces substantial downside risks after last month’s historic Brexit vote to end its membership with the European Union.

Contracting oil demand from China also seems to raise concerns over the current demand-supply scenario. According to data released on Tuesday, Chinese oil demand fell by 2.7% to 10.88 million barrels per day in May on a year-on-year basis. Drop in Chinese oil demand marked a fourth consecutive month of fall, which resurfaced China-led global economic worries and might contribute to decrease in fuel consumption.

Investors now turn their focus to US weekly stockpiles data to be released by the Energy Information Administration later today at 10:30 ET. Consensus estimates points to a drawdown in US crude supplies, for eighth week in a row, by 2.3 million barrels during the week ending July 8. Any further signs of oversupply would disappoint investors and might continue to pressurize oil prices in the near-term.

Technical outlook

Tuesday’s sharp recovery could be categorized as short-covering led technical bounce. The presumption would be confirmed if the commodity sustains its weakness below $46.00 level. Hence, a decisive break back below $46.00 immediate support might exert additional selling pressure that could drag the commodity back below $45.00 psychological mark. The momentum could then get extended, even below $44.00 round figure mark, towards 100-day SMA support near $43.50 region.

Meanwhile on the upside, bullish momentum above $46.50 immediate resistance seems to boost the commodity further beyond $47.00 round figure mark, towards its next major resistance at 50-day SMA near $47.80-90 region (just below $48.00 mark).