Strong Production Drives Crude Oil Lower

Strong crude oil production is putting pressure on the US petroleum complex driving down prices for diesel and gasoline as well as jet fuel and kerosene. The Energy Information Administration has forecast a large increase in production in the US, mainly due to new drilling techniques, that will push production to 40-year highs by the end of 2015. Despite the recent decline in prices, hedge fund traders continued to add to crude oil positions according to the latest government report.

In its short term energy outlook the Department of Energy has release its estimate of crude oil production in the US. EIA estimates that U.S. crude oil production averaged 7.5 million barrels per day in 2013, the highest annual average rate of production since 1989, and a 1.0-million barrel a day increase from 2012. The EIA expects continued strong production growth in to 2015. EIA projects crude oil production to average 8.5 million barrels per day in 2014 and 9.3 million barrels per day in 2015, which would be the highest annual rate of crude oil production since 1972.

The increase in perceived production is priced into the term structure of the crude oil futures curve. As seen from the chart above, the March 2014 price minus the March 2015 is printing near 6.70, which reflects a robust backwardation in prices. In fact, crude oil in one year from now is trading near $86 dollars a barrel. Generally a backwardation reflects strong demand for crude oil in prompt contracts, but in this case it is more of a reflection of strong supply in 2015.

The price of WTI crude oil moved below trend line support and is poised to test lower levels. The next level of target support is seen near $90 per barrel. Momentum on the February futures contract is negative with the MACD (moving average convergence divergence) index printing in negative territory after generating a sell signal at the beginning of the year. The RSI is printing near 33 which is the lower end of the neutral range and just above the oversold trigger level of 30.