Oil Fundamental Analysis – Forecast for the Week of February 27, 2017

U.S. West Texas Intermediate crude oil and international Brent crude oil zig-zagged last week before settling slightly higher. One again, investors had to weigh the bullish fundamental news against the bearish fundamental news before settling on a direction.

April WTI crude oil closed at $53.99, up $0.21 or +0.39% and April Brent crude oil ended the week at $55.99, up 0.18 or +0.32%.

Crude oil futures started the week on a strong note with the April WTI futures contract rallying to $55.03, its highest level since January 17. The catalyst behind the rally was optimism over compliance with OPEC’s plan to reduce output.

The market was primary supported by comments from OPEC Secretary General Mohammed Barkindo, who said he was “cautiously optimistic” on the outlook for the oil market.

“Confidence has returned to this market,” he said at a news conference at Energy Institute’s IP Week. “It’s a work in progress, but the trend I think has commenced.”

Barkindo also said that the production data for January in OPEC’s most recent monthly report showed conformity from participating OPEC nations with agreed output curbs above 90 percent. “All countries involved remain resolute in the determination to achieve a higher level of conformity,” he said in a speech.

After the initial thrust to the upside, crude oil prices consolidated the rest of the holiday-shortened week, driven primarily by the latest U.S. Energy Information Administration’s inventories report for the week-ending February 17.

According to the EIA, U.S. crude oil stocks rose by 564,000 barrels. The gain was below analysts’ expectations for an increase of 3.5 million barrels.

On Friday, oilfield service firm Baker Hughes reported its weekly count of U.S. oil rigs topped 600 for the first time since October, 2015. Last week, drillers added 5 oil rigs.

Forecast

We could see further consolidation this week as traders continue to remain focused on the global rebalancing act. Their attention is centered on OPEC compliance and U.S. production growth.

At the start of the week, OPEC’s average compliance, according to the International Energy Agency is at 90 percent for January. Reuters says compliance is at 88 percent.

According to the EIA, U.S. production rose to above 9 million barrels per day, the highest since April. Additionally, exports from the United States, which is not part of the deal, hit a record high of 1.2 million bpd last week.

Government records show that the futures markets are saturated with long positions, mostly from hedge funds. The current price action indicates they like to buy dips, but are shying away from buying strength. This type of price action can’t continue for much longer before a few of the longs start to lose patience. Most traders realize that the good news from OPEC seems to be priced in, therefore, because of the increasing U.S. production, I believe the market is vulnerable to the downside.

In my opinion, only surprise news from Russia about increased production cuts, or news of a possible extension of OPEC’s plan, will prevent this market from drifting lower over the near-term.