Oil Price Fundamental Weekly Forecast – Rally Needs OPEC to Extend Production Cuts

U.S. West Texas Intermediate and international-benchmark Brent crude oil closed sharply higher last week mostly in reaction to a bullish report from the International Energy Agency (IEA). The data in the weekly EIA inventories report is still skewed because of Hurricane Harvey and the number of oil rigs dropped last week.

November WTI crude oil settled the week at $50.44, up $2.38 or +4.95% and December Brent crude oil closed at $55.42, up $1.84 or +3.43%.

IEA Looking for Demand to Accelerate

According to the IEA, global oil demand is set to accelerate faster than anticipated this year. Strong second-quarter demand has buoyed oil markets, which have been struggling to rebalance as a supply glut has weighed heavily on prices, the IEA said in its September report released on September 13.

The raw data in the IEA report strongly indicated that a rebalancing of the market is underway. The IEA increased its growth estimate for the year to 1.6 mb/d, or 1.7 percent. For 2018, the IEA is predicting growth of 1.4 mb/d, or 1.4 percent.

In August, the IEA has anticipated annual growth would hit 1.5 mb/d, again an increase on July’s 1.4 mb/d forecast.

EIA Inventories Report

In other news, U.S. crude stockpiles rose sharply last week and gasoline inventories fell the most on record as refineries continued to be hampered by damage from Hurricane Harvey, the Energy Information Administration (EIA) said on Wednesday.

Crude inventories rose 5.9 million barrels, compared with analysts’ expectations for an increase of 3.2 million barrels.

The EIA also said refinery utilization rates fell by 2 percentage points to 77.7 percent, the lowest rate since 2008, as crude runs fell 394,000 bpd.

Gasoline stocks fell 8.4 million barrels, the largest draw on record. Analysts were looking for a 2.1 million-barrel drop.

Distillate stockpiles, fell 3.2 million barrels, versus expectations for a 1.5 million-barrel drop, the EIA data showed.

Finally, U.S. crude imports fell last week by 1.2 million bpd to 5.7 million bpd, the lowest on record. U.S. crude exports fell to 6.5 million bpd, the lowest since 2014, when crude export restrictions were first relaxed.

Baker Hughes Rig Count

The number of rigs exploring for oil in the U.S. fell by eight this week to 936. Energy oilfield services company Baker Hughes said Friday that 749 rigs sought oil.

Forecast

With the IEA growing more confident that shifting fundamentals are enabling demand to catch up with supply, it looks like investors are also gaining confidence based on last week’s price action. The price action on the weekly chart seemed to reflect growing investor confidence with the main trend changing to up on the weekly chart for the first time this year.

Traders know that the EIA report was a hurricane-altered report so I believe last week’s rally was primary fueled by trader reaction to the IEA’s bullish outlook.

With IEA saying the global oil glut was shrinking thanks to strong European and U.S. demand, as well as production declines in OPEC and non-OPEC countries, I think the groundwork has been laid for higher prices, however, investors haven’t decided if they prefer to buy dips or buy strength.

This week’s price action tells me that traders are leaning to the upside, but will only buy strength if supported by news. During periods when news is scare, prices may drift sideways-to-lower as investors seek value. During news driven periods, investors are going to go after offers with strong upside momentum.

The next major news event that could send the market over the top will be OPEC’s decision to extend its plan to cut production, trim the global support and stabilize prices. With prices rising, I can’t see any reason why OPEC and Russia won’t go along with extending the program since it seems to be working.

Gains could be limited if demand for crude oil from the refineries or demand for gasoline from consumers starts to weaken once all the refineries in the Houston area are back on line.

Now that prices have recovered from their summer lows and are trading at about 50% of the year’s range, we could also see an increase in the rig could. This could also put a lid on any rallies but we won’t know the number until next Friday.