Oil Fundamental Analysis – Forecast for the Week of February 20, 2017

U.S. West Texas Intermediate and International Brent crude oil futures contracts posted inside moves last week, representing trader indecision and impending volatility. For a sixth straight week, or essentially since the start of the new year when OPEC implemented its plan to cut daily production, crude oil prices have been capped by reports of rising U.S. inventory and supported by increasing compliance with OPEC’s program to reduce daily output, trim the global supply glut and stabilize prices.

For the week, U.S. April WTI crude oil closed at $53.78, down $0.55 or -1.01% and April Brent crude oil finished at $55.81, down $0.89 or -1.57%.

According to the U.S. Energy Information Administration’s weekly inventory data, U.S. oil stockpiles swelled to a record 518.2 million barrels the week-ending February 10, and gasoline inventories also hit a record 259.1 million barrels, gaining 2.8 million barrels.

The EIA’s report also showed that U.S. oil producers sent a record 7 million barrels of crude into the international market. This occurred at a time when OPEC may have reduced its daily output by nearly the same amount.

This serves as proof that U.S. producers are filling the market void created by OPEC. It is also an indication that shale production may allow U.S. producers to become a major player in the world export market. The 1 million barrels a day that U.S. producers exported is nearly double the level reached only a week earlier.

While U.S. production held steady at just under 9 million barrels a day last week, the U.S. government says it expects shale production to increase by 80,000 barrels a day next month, and it forecasts overall oil production to reach 9.5 million barrels a day next year.

Even with the huge export number, the U.S. was able to put 9.5 million barrels into storage the week-ending February 10. However, contributing to this figure was the importing of 7.5 million barrels.

On OPEC’s side of the equation, the cartel reported that compliance with its program to reduce daily output has reached 90%. Additionally, OPEC is so pleased with the results that even if it doesn’t reach its goals, it is rumored to be considering extending the program after July.

Forecast

We start another week with the crude oil markets overloaded with long positions, mostly hedge and commodity funds. Something has to start giving soon because the price action suggests that new buyers are hesitant about buying strength. This may mean that the funds may have to shake the tree a little to force the weaker longs out of the market.

From a technical standpoint, WTI crude is being capped by $54.99 and being supported by $52.40. This market could turn bullish if $55.00 is taken out with conviction. If there is a sell-off then look for $51.05 to $49.66 to provide support.

Brent crude is being limited to the upside by $57.10 and supported by $54.21. Taking out $57.10 and sustaining the move could trigger a rally into $58.92. If the support fails then look for $52.63 to $51.15.

Fundamentally, rising U.S. supply will exert a bearish influence and increasing compliance with OPEC’s program will be supportive. The outside factors that could influence the price action are the U.S. Dollar and OPEC’s rumored plan to extend the program to cut supply.