The Energy Information Administration released its weekly numbers today and there was plenty in them for both the bears and the bulls.

The bear camp greeted the inventory numbers with cheers of delight as well they should considering that the data showed a stunningly large 10.4 million barrel build over the previous week.

Gasoline inventories actually fell by 1.5 million barrels while distillates rose 2.9 million barrels.

As soon as the data hit, crude was knocked lower but as traders had time to pour over the data, back in came the bulls goring the new shorts in the process and taking the market higher and through $35 for the first time in two months.

The reason? A very sharp fall in US daily production numbers. I have been monitoring this decline for some time now and have been remarking that it is the reason I believe that crude oil has bottomed out and that $26 will prove to be the low for a long time barring some sort of catastrophic news out of OPEC.

While the huge build in storage is obviously negative, we are talking about the FUTURES markets; not the PRESENT markets nor the PAST markets. The futures markets all are forward looking. That is their very nature. I have this many times… the oil markets have already factored in the worst case scenario and are no longer interested in that unless there is some FRESH and UNEXPECTED lousy news from somewhere. Right now there is not a trader on the planet who does not already know that oil inventory levels are oppressive. That is OLD NEWS. It will therefore take FRESH NEWS to drive this market lower and that news will need to be uniformly bearish unlike what we got today which was a mix of bearish inventory data and bullish production output data.

Here is the freshly updated production output chart.

Production fell yet another 25,000 barrels/day bringing total output to 9.08 million barrels per day. That is the lowest output since November 2014. You might recall, that was the month during which OPEC, at their then Vienna, Austria meeting, refused to cut production sending crude oil careening down below $80 and ushering in its precipitous decline and all the subsequent woes associated with it. This is what the market is looking at with many, including myself, expecting production to fall below 9 million barrels per day next week or certainly before the month of March is out. That is where the buying is coming from in here.

The bears continue to make their case about storage levels reaching critical points and they have a good argument there. The question is what is the market going to focus on – the high storage levels or the solid trend of declining output? Looks to me like the latter.

On the storage front, supplies at Cushing, Oklahoma also increased this week. This is the fifth consecutive week of such increases. Storage levels are now at 66.256 million barrels with total capacity estimated to be at 73 million.

This is shaping up in my mind to be the basis for a type of price movement which SLOWLY grinds higher. The upside is capped by those huge inventory levels which will need to start coming down but the downside is limited by declining production. Further bolstering the downside is the so-called “freeze” being discussed by various OPEC countries and Russia. There is still a mind set out there that expects these “freeze” talks to lead to actual cuts but I am more skeptical about that mainly for reasons I have been citing quite frequently of late and that is Iran.

Here is an updated price chart showing how crude is flirting with stubborn resistance near $35. It does remain above its 50 day moving average which is going to be noted by technicians.

It it can finally clear this level it should make a rather quick run to test its 200 day moving average near $37.50. It will more than likely take some sort of bullish production cut news from OPEC to enable it to clear that hurdle however.