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Crude Oil Supplies Are Enormous

Crude oil continued lower this past week as the market rejected prices above the $50 level on active month NYMEX crude oil futures. With both WTI and Brent now comfortably below $50 and prospects for commodities looking shaky at this point, these markets could be in for more losses in the sessions ahead. Technical action points lower in crude, as momentum is certainly negative. Fundamentals are also negative from both a macro and micro economic perspective.

Huge inventories weigh on price

These days, the world is awash in crude oil. In the United States, the Energy Information Administration reported last week on October 21 that crude oil inventories rose by 8 million barrels for the week ending on October 16, bringing total stockpiles to 476.6 million barrels. The prior week inventories rose by 7.6 million barrels. These are the highest inventory levels since April 2015. The stockpiles of U.S. crude oil rose for the fourth consecutive week. Over recent weeks, there have been some massive builds in U.S. crude inventories.

Brent crude has also been weak as OPEC members continue to pump record amounts of the energy commodity. Last week markets received two signs of a continuation of the global economic weakness that weighs on the demand side of the fundamental equation. ECB President Mario Draghi said on Thursday that European interest rates are likely to move lower in December and signaled that quantitative easing could continue beyond the September 2016 deadline for the program. While lower interest rates are not necessarily bearish for commodity prices, including oil, economic lethargy is certainly a negative factor for demand.

On Friday, the Chinese government cut domestic interest rates for the sixth time in 2015. The government continues to combat stagnant growth in the Asian nation with a number of economic tools including monetary policy. It is likely that economic numbers due out in the near future will show continued pressure on the Chinese economy. Economic weakness in China is negative for crude oil demand as the Chinese are the world's largest consumers of commodities by virtue of the size of their population. Recent data has pointed to China transitioning from a manufacturing-based economy to a consumer-based economy.

OPEC members and the Russians are continuing to pump and sell as much crude as possible onto the international market, which is yet another negative factor for price. Last week, the final approval of the deal with Iran that will ease sanctions just means more crude oil finding its way to the market.

Meanwhile, as inventories grow in the United States, there are signs that production will fall soon.

Brent-WTI moving back to historical norms

On Friday, October 23, Baker Hughes (NYSE:BHI) report that rig counts in the oil patch fell by another rig over the past week, bringing the total number in operation to 594. Last year at this time, the total rig count stood at 1,595. This means that U.S. production will eventually fall below...


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