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Crude Slumps on Weak Demand Despite Geopoltics

David Becker
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www.iforex.com

Crude oil prices moved lower on Friday, and continue to trade under pressure Monday due to lack of demand and sufficient supply. Geopolitical turmoil in Iraq, along with heightened tension in Gaza have failed to buoy crude price. Traders have instead focused on the lack of demand for gasoline and robust production out of Iraq, which pushed crude oil down nearly 2.6% this week.

The escalation of violence in northern Iraq that started in June has introduced significant uncertainty into the Iraq oil production outlook. The Department of Energy in its July Short-Term Energy Outlook forecasts Iraqi crude production to average near 3.1-3.2 million barrels per day throughout the forecast period, which runs through 2015. The EIA has reduced Iraqi production growth in both 2014 and 2015 to take into account recent geopolitical events, lowering total production by 0.6 million barrels per day.

This comes despite recent production growth, which caused Iraq to surpass Iran as the second-largest producer in OPEC, after Saudi Arabia. Production in 2014 continued to climb, reaching 3.3 million bbl/d in May, and 150,000 bbl/d higher than May 2013.

Demand continues to edged lower according to the EIA’s recent estimate. Over the last four weeks, gasoline demand averaged over 9.0 million barrels per day, down by 0.4% from the same period last year. Distillate fuel product supplied averaged 3.8 million barrels per day over the last four weeks, down by 6.2% from the same period last year.

Crude oil prices are edging toward medium term trend line support that has held steady during the course of 2014. A break of the 100.00 level would lead to a test of support near 96. Momentum is negative as the MACD (moving average convergence divergence) index is printing in negative territory with a downward sloping trajectory. The RSI is also moving lower reflecting accelerating negative momentum while printing near 37, which is on the lower end of the neutral range.

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