Traders Sell Oil on Fears of Tomorrow's Report on US Crude Inventories

01/06/2015 8:14 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

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The speed of the recent drop in oil prices and the extreme negativity on the market suggests the possibility of a bounce after the release of numbers tomorrow, but MoneyShow’s Jim Jubak explains why a bounce wouldn’t reverse the downward trend.

The plunge in oil prices continued today with US benchmark West Texas Intermediate falling 4.04% to $48.02 a barrel and European benchmark Brent tumbling another 3.97% to $51.00 a barrel at the close.

The rout comes as traders sell to protect themselves from what is now expected to be a very negative report on US inventories due for release tomorrow. US crude inventories are projected to climb, a Bloomberg survey shows, by another 700,000 barrels this week to a projected 386.2 million barrels in the data to be released by the Energy Information Administration tomorrow for the week ended January 2. Inventories of crude and gasoline are at their highest seasonal level since the US Energy Administration started issuing weekly inventory reports.

With West Texas Intermediate at $48 a barrel, and Brent at $51 a barrel, and with both crude benchmarks down a hefty 4% today, rationally, you could say that a lot of bad news is already priced into the crude market.

But the fear here is that the market is in the grip of a bear psychology so strong that throwing rationality out the window is the smart move. If the inventory numbers come in worse than expected tomorrow, West Texas Intermediate and Brent prices could take another beating. The news trend has been decidedly negative recently with supply continuing to rise and any evidence of production cuts scarce on the ground. In this atmosphere no one wants to stand in the way of falling prices on the possibility of more bad news tomorrow.

The speed of the recent drop and the extreme negativity on the market does suggest the possibility of a bounce after the release of numbers tomorrow. But a bounce wouldn’t reverse the downward trend.

The consensus is that we need to take something like 1 million to 2 million barrels a day out of global supply to clear the oil market. So far, supply is still increasing. No trader wants to stand in the way of that trend. 

The possible drops on bad news that I’m hearing analysts and traders project aren’t especially scary in dollar terms. For example, I’ve seen commentary on Bloomberg saying that if the news is bad, Brent could fall through $50 a barrel. With Brent crude at $51 today that doesn’t seem especially horrifying.

But looking around, traders don’t see a drop of $50 a barrel as putting in a bottom. What traders see instead is that a fall through the psychologically important $50 level just sets up the market for further drops. Absent something that indicates that supply is coming out of this market, traders don’t see any reason for the downward trend to reverse.

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