Oil Fundamental Analysis – Forecast for the Week of March 13, 2017

U.S. West Texas Intermediate and international Brent crude oil broke sharply last week with the U.S. futures contract taking out the psychological $50.00 level and the international futures contract closing with enough downside momentum to challenge this level early this week.

Prices fell nearly 10% last week with the bulk of the break coming on March 8 after the U.S. Energy Information Administration (EIA) reported a ninth straight rise in U.S. crude stockpiles.

May WTI crude oil finished the week at $49.03, down $4.75 or -8.83%. May Brent crude oil closed at $51.37, down $4.53 or -8.10%.

According to the EIA, the amount of crude oil in U.S. storage reached another record high the week-ending March 3, jumping 8.2 million barrels. The inventory build was more than four times analysts’ estimates.

Additionally, weekly figures also showed U.S. oil production rose to 9.1 million barrels a day, the highest level in more than a year. The continuing rise in U.S. output is thwarting the efforts by OPEC, Russia and 10 other exporters to reduce daily output, trim the global supply and stabilize prices.

Also helping to press prices lower were bearish comments from OPEC. Early last week, Saudi Oil Minister Khalid al-Falih warned at CERAWeek that the kingdom would only support OPEC’s intervention in markets for a “restricted period of time” and would not “underwrite the investments of others at our own expense and long-term interests.”

Finally, on March 10, energy services firm Baker Hughes, Inc. said U.S. drillers added oil rigs for an eighth week in a row to the most since September 2015, extending a ten-month recovery.  Drillers added eight oil rigs in the week to March 10, bringing the total count up to 617, versus 386 rigs a year ago.

Forecast

All the pieces appear to be in place for a further decline in oil prices this week. The jump in the rig count probably assures that production will rise again. The lack of cohesion among OPEC members is also raising concerns. Subdued refinery activity as operators perform seasonal maintenance in the U.S. could also put a lid on any rallies. A weaker U.S. Dollar could soften the landing, however.

Prices could settle into a range over the near-term with the former bottoms becoming new tops if there is renewed talk of an extension of OPEC’s plan to curtail output. The current plan shows 94% compliance from the participants although Saudi Arabia has exceeded its pledge. Russia has not lived up to expectations and Iraq is producing more.

I think we can say we have reached the proverbial line in the sand. Prices could continue to fall if the U.S. keeps producing and supply remains at a record high. Or, prices could stabilize or even begin to rise if OPEC starts to talk about extending the production cuts.