CRUDE OIL

WTI Crude Oil Prices Could Dip Below $30 a Barrel as Fed's Lacker Sees More Than Four Hikes This Year

Witawat (Ed) Wijaranakula, Ph.D.
Fri Jan 8, 2016

The U.S. Department of Labor said on Friday that nonfarm payrolls for December came in at 292,000, exceeding economistsí expectations of 200,000. The better-than-expected jobs report raises the probability of a rate hike at the Fedís FOMC meeting on April 27 to over 50%, according to data from the CME Group. This sent the spot WTI crude oil price on a roller coaster ride, as it traded in the range between $34.34 and $32.64 per barrel on Friday, before closing down 0.3% for the day at $33.16 a barrel. 

Concerns over some U.S. Federal Reserve officials talking about aggressive rate hikes, a second day of trading halts to China's stock markets within a week, and the yuan devaluation by the Peopleís Bank of China (PBoC), sent the spot WTI crude oil price crashing 2.35% on Thursday. According to Reuters, Richmond Federal Reserve President Jeffrey Lacker said in a speech on Thursday that the Federal Reserve may need to raise interest rates more than four times this year if oil prices stabilize, the dollar stops appreciating and inflation surges toward the U.S. central bank's goal of 2%. 

China's CSI 300 stock index, which tracks 300 stocks on the Shanghai and Shenzhen stock exchanges, was halted again on Thursday after falling more than 7% and triggered circuit breakers, as the PBoC set the daily reference rate to a five-year low of 6.5956 yuan per dollar after the spread between the onshore and offshore yuan spot surged as high as 19 basis points.

Earlier in the week, the spot WTI crude oil price took a 5.76% nosedive on Wednesday, to close at $36.14 a barrel, after the U.S. Energy Information Administration (EIA) reported that U.S. commercial crude oil inventories rose to 482.3 million barrels, down 5.1 million barrels in the week ending January 1, compared to expectations of a Platts poll of analysts for an inventory increase of 2.75 million barrels. 

The EIA also said that total motor gasoline and distillate fuel inventories increased last week by 10.6 and 6.3 million barrels, respectively, compared to analystsí expectations of a 1 million barrel decrease in gasoline and 2.1 million barrel fall in distillate fuel inventory. Oil companies apparently lowered their taxes, at the end of 2015, by converting their idle crude inventories to motor gasoline and distillate fuel.

Excluding the Strategic Petroleum Reserve (SPR) of about 695.1 million barrels, U.S. crude oil inventories remain near the peak level of 490.9 million barrels set in the week ending April 24, 2015. On Tuesday, the American Petroleum Institute (API), an industry group that represents about 400 oil and natural gas corporations, said its crude oil inventory data for the week ending January 1 showed a draw of 5.6 million barrels.

The EIA said stockpiles at Cushing, Oklahoma, the delivery point for WTI futures and the biggest U.S. oil-storage hub for WTI futures, rose by 917,000 barrels to 63.91 million barrels, a new record level. Total storage capacity for the site was 71.4 million barrels as of March 31, according to the EIA.

As of December 29, there were 238,919 long positions of light sweet crude oil futures, traded on the New York Mercantile Exchange (NYSE) by managed money or hedge funds, an increase of 3,800 long positions from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC). This is compared to about 165,168 short positions, a decrease of 7,894 short positions from the previous week where light sweet crude oil contracts are traded in units of 1,000 barrels. Apparently, hedge funds were making a wrong bet on a rebound of crude prices and increased their net long positions by about 11,691 contracts. 

From our long-term technical viewpoint, the crude oil price broke down the trendline support of the ascending wedge chart pattern at $57.18 per barrel in December 2014. The price projection for WTI crude after the ascending wedge breakdown event is $22.20 per share, determined by subtracting the width of the wedge pattern from the point of breakdown. 

Since the ascending wedge breakdown, the price of crude continues its downtrend in a bearish lower low chart pattern, meaning every low (L) is lower than the previous low. Aggressive rate hike talks by Fed policy makers could send the crude price to levels below $30 per barrel, as such talks will impact the U.S. dollar and crude oil prices, along with raising investor concerns about money flows into the capital-intensive shale oil drilling business.

A potential price war between Saudi Arabia and Iran, after Saudi Arabia cut diplomatic ties with Iran on Sunday, may be on the horizon and put downward pressure on the crude prices. The Saudi oil minister, Ali al-Naimi, told the Wall Street Journal in Riyadh in December that, ďIt is a reliable policy and we wonít change it. We will satisfy the demand of our customers. We no longer limit production. If there is demand, we will respond. We have the capacity to respond to demand,Ē he said. 

On Tuesday, Saudi Arabia sharply cut the prices it charges for crude oil in Europe, a move that could undercut Iran as sectarian tensions escalate between the rival Middle Eastern nations, said The Wall Street Journal.

CRUDE OIL ANALYSIS

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