Oil Price Fundamental Weekly Forecast – Rising U.S. Production Makes Crude Oil Fragile

U.S. West Texas Intermediate and international-benchmark Brent crude oil hit new highs for the year early last week, but the buying wasn’t strong enough to sustain the rally and the market finished lower for the week.

For the week, May WTI crude oil settled at $64.94, down $0.94 or -1.43% and June Brent crude oil finished at $69.34, down $0.47 or -0.67%.

The sell-off did not come as a surprise, however, because the rally was built on speculation. These buyers were driving prices higher on the hopes that the OPEC-led production cuts would be extended beyond 2018 and into 2019.

However, the move seemed a little premature since the cartel and other major producers aren’t expected to discuss the matter until June and probably won’t even make a decision until November. Furthermore, the price action prior to the rally suggested hedge funds were selling crude. Therefore, we have to conclude that the recent rally was likely generated by short-covering rather than real buying.

Crude oil futures began the week supported by a rebound in stock markets and escalating Saudi-Iran tensions. Global stocks came off six-week lows on optimism that the United States and China are set to begin trade talks, easing fears about a trade war between the world’s two largest economies. The market also found support from rising Middle East tensions between Saudi Arabia and Iran. These events drove prices to their highs.

Traders started to take profits shortly after the new highs for the year were hit. They probably realized the buying was strong enough to sustain the rally.

After reaching its high and reversing to the downside on Monday, prices started to break sharply late Tuesday after the American Petroleum Institute (API) reported an unexpected 5.3 million barrel build in crude oil stocks the week-ended March 23. Traders had built in a 1.6 million build.

Prices retreated further on Wednesday after the U.S. Energy Information Administration reported a 1.6 million barrel jump in inventories versus a 500,000 estimate. At the same time, inventories at the Cushing, Oklahoma futures hub surged by 1.8 million barrels.

In other news, U.S. energy companies this week cut oil rigs for the first time in three weeks. Drillers cut six oil rigs in the week to March 29, bringing the total count down to 798, General Electric Co.’s Baker Hughes energy services firm said in its closely followed report on Thursday.

Prices finished higher on Thursday with crude oil ending the quarter up 7.5%.

Forecast

Both the WTI and Brent futures contract posted technical reversal tops last week. If there is a follow-through to the downside, we could see the start of a 2 to 3 week correction.

Using the supply/demand fundamentals as our guide, we feel the crude oil market is vulnerable to the downside due to rising U.S. production.

One factor that could stop a break, or even trigger further short-covering are on-going tensions in the Middle East.

The factor that could move the market in either direction is appetite for risk. This is likely to be manipulated by trade war fears. If the on-going negotiations between the U.S. and China end without a compromise then President Trump is likely to follow-through on his threat to impose sanctions on China. This could be potentially bearish for crude oil.

If there is a compromise and stocks rally then look for crude to be underpinned.