Oil Trading near Two-month Low, NFP Data Eyed for Fresh Impetus

On Thursday, WTI crude oil dropped sharply to its lowest level in nearly two months after the official government data showed a smaller-than-expected drawdown in weekly crude oil inventories. According to the EIA report crude oil supplies declined by 2.2 million barrels to 524.4 million barrels for the previous week through July 1. Last week’s drop marked a seventh-straight weekly drawdown in crude stockpiles but was still at historically high levels for this time of year.

The data disappointed oil traders expecting larger declines of 2.6 million barrels and was well below 6.7 million barrels of fall reported by trade group the American Petroleum Institute late Wednesday. Adding to this, ongoing concerns over a potential slowdown in global oil demand combined with signs of a potential recovery in US drilling activity, further fueled worries over a global supply glut and aggravated Thursday’s slide in the commodity prices.

On the last trading day of the week, oil prices rose modestly higher but is seen struggling to build on to its recovery gains and is currently trading below $45.50 level as oil traders now await for the release of key US jobs data that would further influence movement in oil prices in the near-future. Economists expect the report to show that the US economy added 180k new jobs in June. The unemployment rate is expected to tick higher to 4.8% and average earnings are anticipated to rise by 0.2% on monthly basis.

Recent news-flow from the US has been showing signs of improvement in the overall health of the economy. Thursday’s ADP report showed US private sector employment added 172k jobs in June and initial jobless claims dropped to 254k. The incoming data is pointing to a surprisingly strong headline number. Markets would also be interest to see if May’s dismal payrolls figure is revised higher, which would be highly supportive for the US Dollar. A stronger greenback hurts demand for dollar-denominated commodities – like oil.

 Technical outlook

Oil is now sustaining its weakness below multi-week lows strong support break-point, now turned immediate resistance near $45.80-$46.00 mark, also coinciding with 23.6% Fibonacci retracement level of $27.73-$51.64 2016 up-swing. Hence, on a sustained weakness below $45.00 the commodity is likely to continue drifting lower and seems more likely to break below $44.00 handle to test its next major support near $43.40-35 area, just above 38.2% Fibonacci retracement level. Intermediate support is pegged near $44.50 region.

Alternatively, a bounce back above $46.00/barrel mark, support turned immediate resistance, would increase the prospects of additional recovery and boost the commodity back towards $47.00 handle. This $47.00 resistance now seems to cap any further near-term recovery for the commodity.