The crude oil price reversed some of its gains as several shale producers pointed to an early return to production.
Shale producers point to an early return
American shale producers have been among the worst affected companies during the current decline in crude oil prices. This is because these companies make a profit when the price of oil is mostly above $30 per barrel. As a result, some of them have started to consider bankruptcy protections. They have also idled wells and cut jobs. According to Baker Hughes, oil companies have idled more than 300 wells this year.
However, several shale companies have started talking about returning to work. Diamondback, which is now seeking bankruptcy protection, has said that it may return to production if oil prices remain between high $20s and $30s. Parsley Energy, another shale company that has idled a fourth of its wells has pointed to $30 while Centennial Resources has hinted at $25 per barrel.
The challenge for returning to market this time is that it will lead to more supplies at a time when demand is simply inexistent. Therefore, it will lead to more supplies and push crude oil price further.
US inventories drop
The crude oil price ignored data from the EIA. The report showed that oil inventories increased by 4.6 million. While this was a big number, it was the lowest it has been since March. Analysts polled by Bloomberg were expecting inventories to jump by more than 7 million barrels.
Perhaps, the market is irked by an increase in US oil production. According to the EIA, US refinery inputs rose by 216k barrels to 13 million barrels every day. These refineries operated at about 70% of their total capacity in this period. At the same time, the US increased its imports by 410k barrels per day even though demand is falling.
Still, some analysts have started to predict a rising demand. In a tweet, Javier Blas, a reporter at Bloomberg, said that Morgan Stanley had joined Goldman Sachs in predicting that the worst was over for oil.
BOTTOM OUT: Morgan Stanley joins Goldman Sachs in calling the worst is over for oil: “The greatest mismatch in supply/demand is probably behind us”. But it warns of a long and painful road ahead: “The rebalancing will likely be drawn out and have its fits-and-starts”. #OOTTpic.twitter.com/4thR9Psk04
On the daily chart, we see that the WTI crude oil price has moved above the 38.2% Fibonacci retracement level at 24.50 as bulls have remained in control. Similarly, the price has remained above the 50-day and 10-day moving averages. Therefore, I expect the bullish trend to continue if bulls can defend the 38.2% retracement. If they do this, then the next target will be the 50% retracement level at 32.58.
On the flip side, a move below the 38.2% Fib level will send signals that bears are still strong. This will then invalidate the bullish thesis because bears will then target the 23.6% retracement level at 15.00.