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Oil Tests Support as Supply Overwhelms Demand

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Oil prices continued to trade on the defensive, as supplies of US crude in the United States oil surge to 80-year highs.  Although demand continues to remain strong, the rapid increase in the US dollar also is generating headwinds for oil prices.  Prices have edged below $45 dollars a barrel and are poised to test target support levels.

Since the majority of oil prices globally are quoted in US dollars, as the value of the dollar increases, the value of crude oil needs to keep pace.  Thursday’s ECB announcement of quantitative easing pushed the dollar to 12-year highs against the Euro, which could continue to perpetuate.

The central bank will embark upon overall purchases of around EUR 60 billion per month of bond purchases through to the end of 2016, which puts the total at over EUR 1 trillion. If nothing else the program will help to re-inflate the Eurozone via the exchange rate angle and give a lift to growth through improved exports as the Euro declines.

Along with headwinds created by a stronger dollar, production continues to bloat US inventories. According to the Department of Energy, Crude oil inventories increased by 10.1 million barrels from the previous week, which was greater than expected.. At 397.9 million barrels, U.S. crude oil inventories are at the highest level for this time of year in at least the last 80 years. Gasoline inventories increased by 0.6 million barrels last week, and are well above the upper limit of the average range. Distillate fuel inventories decreased by 3.3 million barrels last week and are in the lower half of the average range for this time of year.

On the demand front, total products demand over the last four-week period averaged 19.7 million barrels per day, up by 4.9% from the same period last year. Over the last four weeks, gasoline demand averaged over 9.0 million barrels per day, up by 8.7% from the same period last year. Distillate fuel demand averaged 3.9 million barrels per day over the last four weeks, up by 12.5% from the same period last year. So while supplies continue to push to new highs, the decline in prices has spurred on demand.

The technical picture continues to point to lower prices.  Prices are testing monthly trend line resistance and are poised to test support near $32.  The crude oil market is oversold with the RSI (relative strength index) printing a reading of 23, well below the oversold trigger level of 30, which could foreshadow a correction.

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