Crude Oil Futures Down 4%, But Oil Companies Increase Production

Crude oil futures marked a fifth losing session in a row and a loss of over 4% for last week.

U.S. supply data released Thursday showed that crude supplies fell 2.2 million barrels for the week ended Sept. 1, but expectations for the report were mixed. The Organization of the Petroleum Exporting Countries will meet Monday in Vienna, with most analysts expecting OPEC to leave quotas unchanged. Weakening economies are the greatest risk to lower prices and without a quota revision, OPEC would not be well prepared to deal with it. The cartel could cut back production in the event that world oil demand weakens.

However, other news helped to calm concerns about potential risks to domestic oil supplies. This week BP (BP) said that the Prudhoe Bay oil field could resume its usual pumping capacity by the end of October. The oil field has been producing about half its usual output following the discovery of a pipeline leak and corrosion early last month.

Royal Dutch Shell's (RDSA) announced that its Mars Tension Leg Platform, heavily damaged during Hurricane Katrina, is producing about 20% more than it did before the storm. Finally, on Tuesday, Chevron Corp. (CVX) announced that a successful well test in the Gulf of Mexico could potentially unearth an important reservoir of oil.

The nuclear standoff between Iran and western nations has intensified, with Tehran's refusal to stop enriching uranium for its nuclear program. Concerns about the potential risk to oil supplies stemming from the dispute between Iran and western nations could limit losses in the oil market.

Taking a look at the larger picture, with the elimination of hurricane threats as each week passes, the market should feel the weight of the supplies bring prices lower. The expectation for a firm rather than soft economic landing could also help send prices down. In my opinion, this is the most significant element toward a oil price reduction.

On the technical side, in the chart below, you can see that, in the weekly time frame, the Index printed a top line last May after a long upward trend that moved prices from the level of 80 in 2003 to more than 235.

The average directional movement index [ADX], which measures the strength of a trend, indicates the lack of a formed and defined trend. The moving average convergence/divergence [MACD] has printed a negative divergence. Prices in the daily time frame, are developing a bearish triangle. The breakout of the support of 185 would project prices to the 160 level.

Triangles are continuation patterns. At the end of this distribution phase, there will likely be a breakout to the downside. However, anticipate the breakout as an option. Applying breakout techniques might limit risk given the strong long term trend of oil.

[click to enlarge]