The bad news for crude oil began recently after doubts started emerging with regard to a proposed OPEC deal to cut oil production. Partly as a result of these doubts, crude oil prices for the past two weeks have virtually been in a state of free fall. Earlier this week, it was reported that OPEC’s oil output may have reached yet another record high in October, casting further doubts on the potential success of any deal to cut production.
On Tuesday, the situation became even worse, as data from the American Petroleum Institute (API) showed a colossal 9.3-million-barrel increase in US crude oil supplies, the largest weekly increase since March. Exacerbating the oversupply situation even further, the US government’s Energy Information Administration (EIA) reported on Wednesday an even more massive increase of 14.4 million barrels last week, the largest weekly inventory build on record.
In short, the persistent crude oil oversupply situation has continued to deteriorate on a global basis. Even if an oil production deal is successfully implemented, which is not exceedingly likely due to the magnitude of global participation that would be required, it is still highly questionable whether such a deal would even be effective in significantly reining-in global oversupply.
This pessimistic and bearish outlook for oil prices prompted the West Texas Intermediate (WTI) US benchmark for crude oil to dip below $45 at one point on Wednesday, hitting a new 5-week low. In the process, price has dropped below a major uptrend line extending back to February’s low around $26. In addition, the price of crude oil has also dropped below both its 50-day and 200-day moving averages. With any further follow-through on this major breakdown, especially if the OPEC deal fails to materialize in any significant way, crude oil prices could be in for a substantially further slide.
If WTI remains below the noted trend line, extended downside momentum could next target key support around the $42.50 area, followed further to the downside by the $39.00 support target.