Oil prices were on the defensive on Monday as a deal between Iran and the 5 permanent member of the U.N. security council along with robust petroleum inventories generated headwinds for prices. Inventories are currently at a 5-year high, which reflects strong production in the United States. Hedge fund traders have been reducing short positions according to the latest report by the CFTC.
Crude oil prices were under pressure at the open after traders absorbed news over the weekend that the Security Counsil and Iran had reached an agreement over nuclear weapons production. The basic agreement calls for Iran to halt their program in return for the mitigation of a number of sanctions on the country. The news boosted crude oil as supply concerns were reduce and the premium associated with mid-east tension edged lower. This issue is a hot button in Washington DC and could face congressional pressure, creating volatility in the oil space.
According to recent data released by the Department of Energy. Crude oil inventories in the US have ballooned to the highest in the past 5-years.
According to the Energy Information Administration, U.S. crude oil inventories moved higher by 0.4 million barrels in the prior week. At 388.5 million barrels, U.S. crude oil inventories are well above the upper end of the 5-year range. The trajectory of the increase is in line with prior years, but draws in stocks should start in December, which if not realized could pose additional headwinds for crude oil.
On the demand front, total products demand (which include refined products such as gasoline and diesel) the last four-week period averaged 20.3 million barrels per day, up by 7.4% year over year. Over the last four weeks, gasoline demand over 9 million barrels a day or nearly a 4% increase year over year. Distillate fuel demand (which includes products such as heating oil and diesel) averaged 4.2 million barrels per day over the last four weeks, up by 8.8% year over year.
Hedge fund traders decreased short futures and options positions in crude oil according to the most recent commitment of traders report. According to the report released by the CFTC for the week ending November 19, 2013, short position declined by 11K contracts while long positions increased by 1500 contracts. This was for the physically delivered NYMEX crude oil contract, which is the benchmark for US trading. The ICE crude oil contract which is a financially settled contract saw similar movement.
Crude oil futures moved support levels and are poised to test a horizontal trend line near 90.35. Resistance is seen near the 10-day moving average at 94.05.
Momentum on the January futures contract is negative with the MACD (moving average convergence divergence) index generating a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average crosses below the 9-day moving average of the spread). The RSI (relative strength index) moved lower with price action and is printing near 33 which is the low end of the neutral range.
The high levels of crude oil inventory’s, along with the negative momentum reflected by the MACD could likely keep pressure on oil prices potentially pushing them to support near $90.00.