Great Graphic: OIl Breaks Down Further

Today’s 2.5% fall in the September light sweet
crude oil futures contract extends the decline that began on June 9.
  
It is the third consecutive loss and the fifth loss in the past six
sessions.  

There are two important points to make that
this Great
Graphic
from Bloomberg helps illustrates. 
First, the contract has fallen through a 
trend line drawn off the January, February and April lows.   It
flirted the trend line in the first half of the month, but finally and
convincingly broke. it.  We first identified this trend line in the middle of June
The continuation contract staged a key reversal on June 9 (but not the front-month contract at the time).  

Second, with today’s losses the September
contract has nearly completed a 50% retracement (blue line) of this year’s rally
that began in late January at $32.85.
   It had found
support near the 38.2% retracement (top green line).  A break of $42.79
(today’s low $42.97) would suggest a move toward the 61.8% retracement (lower
green line) which matches the mid-April spike low. 

The market‘s
focus has changed. 
The weekly oil inventory numbers seem less
important than they were earlier this year.  It seems that part of the
drawn down has transformed the oil glut into a gasoline glut.  From a
seasonal point of view, gasoline stocks are the highest in more than 20 years.
   Typically as the peak, US
driving season ebbs, the demand for oil drops.  

Over the past five years, oil demand has
fallen by around 1.2 mln barrels a day between July and October.
  With
abundant supplies of gasoline, refineries may shut down for maintenance
early.  There are also some reports of refiners already beginning to shift
their product mix away from summer toward winter.  

On top of these seasonal issues, something
more profound appears to be taking place.
  The US rig count is
rising.  It has increased seven of past eight weeks.  The count has
risen by 55 rigs to 371 since the start of June.  And oil output has risen
for two consecutive weeks.  

There are a few considerations here. 
First, the drop off of shale production drops off quicker than conventional
wells.  That means the need to replace older wells with newer ones is
needed to maintain output levels. 

Second, while the rigs were being taken down, there appeared to be an
emphasis on the least efficient fields.
  Now, however, the new rigs appear concentrated in the lower cost
fields.  

Third, it will be interesting to see how
sensitive the increase of rigs is to the drop in the price of oil.
  The
continuation futures contract has been holding above $45 a barrel until very
recently.  It will be important to see if the drop in oil prices slow the
redeployment of oil rigs.  

Foreign exchange prices are influenced by a large number of factors,
and for some currencies, like the Russian rouble, Mexican and Colombian pesos,
Malaysian ringgit, Canadian dollar and Norwegian krone, the drop in oil prices
appears acting as a drag.
  However, other commodity prices are faring
better.  The JOC-ECRI Industrial Price Index recorded the highs for the
year on July 18 and finished last week pennies below its best
level.  

Disclaimer

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