Is Oil Facing Stiff Resistance At $50?

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Includes: COP, CVX, ENB, SU
by: Gaurav Agnihotri

Summary

Oil prices finally went above $50 a barrel on Thursday for the very first time in the last seven months.

US commercial crude oil inventories were reduced by 4.2 million barrels from its previous week.

It seems that the current bullish trends are not strong enough to offset the effects of the bloated crude oil stocks.

Oil prices finally went above $50 a barrel on Thursday for the very first time in the last seven months. However, prices again dipped on Friday with Brent trading at $49.21 and WTI trading at $49.1 a barrel at the time of writing this article. This clearly shows that oil futures are facing stiff resistance at $50 price level. Let us analyze those factors that are currently supporting oil prices and the ones that are not. We saw how oil prices were steadily moving between $47 and $49 a barrel for the last several days. Although the current global supply outages and U.S crude oil inventory data are supporting oil prices to move up, there are other factors that are pushing the prices down. So, where is oil headed next?

US Crude Oil Inventories and US dollar

As per the latest weekly petroleum data released by EIA, the US commercial crude oil inventories were reduced by 4.2 million barrels from its previous week. This data gave a new direction to the markets and helped oil prices reach the psychological $50 mark earlier this week. It is interesting to note that the previous week's commercial crude oil inventory data showed a surge of 1.3 million barrels in the commercial crude oil inventories and this had resulted in the reduction of oil prices (in spite of the supply outages of Nigeria, Canada, and Libya amounting to almost 4 million barrels a day). This shows that crude oil inventory data is having a significant impact on oil prices. Besides, even a weaker dollar is supporting oil prices to move up.

Canadian Wildfires and Supply Disruptions in Nigeria

The central bank of Canada announced on Wednesday that wildfires will definitely have an impact on Canada's economic output figures. This news supported the upward rally of oil on Thursday as Canada is the biggest supplier of crude oil to the US. However, it needs to be noted that Canada's wildfire is beginning to recede a bit. The mandatory evacuation notice has been lifted at many worker sites and oil production could resume in a phased manner in the coming time. This will be a bearish sign for oil in the time to come. However, this would be good news for companies like ConocoPhillips (NYSE:COP), Suncor Energy (NYSE:SU) and Enbridge (NYSE:ENB) that operate in the affected region.

On the other hand, supply disruption of Nigeria is getting worse by the day. Chevron (NYSE:CVX) had to shut down its facility in Nigeria's Niger Delta after the latest attack on its Escravos Terminal by the terrorist group - Niger Delta Avengers. The same terrorist organization had on Sunday attacked a pipeline belonging to Eni S.p.A. (NYSE:E).

OPEC

OPEC is all set to meet on 2nd June in Vienna and most of the analysts believe that any chance of an 'oil freeze agreement' between the OPEC members seems to be remote. On the other hand, with a possible stand-off between Saudi Arabia and Iran on the issue of oil freeze, OPEC might very well increase its production levels at the next meeting. Saudi Arabia would be anyway increasing its production due to its summer requirement and Iran (whose oil exports have already reached 2 million barrels a day) will continue to ramp up its production levels when compared to its pre-sanction days. This might again be a bearish sign for oil prices in the coming time.

Takeaway

"The market looks pretty well supplied. We've hit a major point at 50 bucks and (traders) don't have enough information to keep betting that prices can go even higher", said one of the brokers at ICAP PLC. As stated by me on May 19th, the current bullish trends are not strong enough to offset the effects of the bloated crude oil stocks. According to me, the recent surge in oil price was temporary and oil will continue to face stiff resistance at $50 for the next two to three months. In fact, after the 2nd June OPEC meet, we can even witness another bearish rally of oil.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.