Oil risks falling 6% if EIA reserves figure falls short

• Oil (WTI) is trading at $78.90, moving further away from $80.
• The markets reacted higher after the surprise strength of the dollar.
• The weekly API figures were disappointing and could push oil prices further lower.

Oil prices lose almost 1.5% this Wednesday ahead of the important weekly Energy Information Administration (EIA) crude oil exchanges with traders nervous of possible disappointment in the expected drawdown. Overnight, figures from the American Petroleum Institute (API) came in below estimates and oil prices plunged. The API figures showed a reduction of -2.418 million barrels, while -2.9 million were expected.

Projections for the EAI numbers for Wednesday point to a drop for both the high and low estimate. To trigger a rebound in oil prices, this Wednesday’s reduction must exceed the higher estimate of -3.1 million. The lower estimate is -2.39 million, so anything in the range or below -2.39 million could mean cheaper oil as US reserves are under demand of less than the expected.

At the time of writing, Crude Oil (WTI) is trading at $78.37 per barrel and Brent at $82.57.

Oil news and movements in the markets

• European Purchasing Managers’ Index figures continue to contract across all sectors, meaning that demand for crude oil in Europe may not pick up any more than current levels.
• At 14:30 GMT the weekly major changes in Crude Oil reserves will be released from the Energy Information Administration (EIA). The expectations are between -2.39M and -3.1M reductions. The previous figure from last week was a cut of -5.96M and will be hard to beat.
• S&P Global will publish its Purchasing Managers’ Index (PMI) for the United States at 13:45 GMT. The services index is expected to hold steady from the previous reading of 52.3 and stand at 52.2 for August. The manufacturing index would remain in contraction, going from 49 to 49.3 points. The general composite index is expected to remain unchanged at 52.0. The numbers will be decisive for the oil market, as any slowdown in the PMI numbers could mean lower demand for oil.
• Tropical Depression Franklin is moving inland away from the Texas coast.
• All eyes are on Friday, with the annual Jackson Hole Symposium taking center stage for the week. In it, the US Federal Reserve tends to signal a change in its monetary policy going forward.

Oil Technical Analysis: Downward Pressure

The price of oil is signaling red flags to markets after the drop in the weekly API numbers on Tuesday. Oil takes another step back on Wednesday ahead of the weekly EAI figures, which could act as a catalyst for a break down in the head and shoulders pattern on the charts. The line in the sand is at $78.50, and once broken, oil prices could drop as much as 6%.

On the upside, $81.68, Monday’s high, are the ones to break to trigger a small uptrend. If WTI continues its trend of higher lows and highs, the pressure could build towards $82. To set a new monthly high, one must break the mid-August high of $84.32, when demand takes over and supply cannot follow suit.

To the downside, a temporary bottom is forming around $78.50 which acts as a base in the current head and shoulders pattern. If the EIA numbers point to a weakening oil price, expect the shoulder pattern to complete, erasing the weekly gains from July 20. Expect some support near $77 from the July 13 double top, but rather look for a bottom around 6% lower near $74.

WTI US OIL (Daily Chart)