Oil Fundamental Analysis – Forecast for the Week of April 24, 2017

At the start of trading last week, hedge and commodity fund traders had several reasons for holding onto their nearly record long positions. Stacked on the side of the bullish investors were the events in Syria, supply disruptions, Saudi Arabia’s support of an extension of the OPEC-led program to cut supply and the global oil supply.

Slowly all the bullishness started to dissipate from the market. Investors started to take out the Syrian premium. As this story started to cycle out of the news, some speculative traders started to book profits.

Additionally, the outages and Libya and Canada became less important as a few of the pipelines went back into operation. The extension story also weakened after Saudi Arabia said it’s still too early to think about it.

With all the bullish factors slowly being removed from the equation, all that was left to determine the direction of the market this week was the U.S. Energy Information Administration’s weekly inventories report.

And that it did, crude oil collapsed nearly 4 percent after the release of the report on April 19.  Actual crude inventories drew down as expected, but gasoline stockpiles increased. This sent the funds heading for the exits. Although it took 15 trading sessions for the market to rally $6.56, it took only 4 sessions to take away 50% of the move. That’s how intense the selling was.

In other news, U.S. drillers added oil rigs for a 14^th week in a row. Drillers added five oil rigs in the week to April 21, bringing the total count up to 688, the most since April 2015.

U.S. June West Texas intermediate Crude Oil closed the week at $49.62, down $3.98 or -7.43%. Internationally-favored July Brent Crude Oil settled for the week at $52.44, down $3.93 or -6.97%.

Forecast

The selling pressure at the close at the end of the week suggests that oil prices could fall further early this week. The June WTI futures contract appears to be on a path to challenge the March 22 bottom at $47.58. On the upside, the nearest resistance is $50.09. This is followed by another major target at $50.86. These two levels are resistance this week.

Simply stated, look for the downside pressure to continue unless WTI crude oil recaptures $50.09. Even then, it’s not likely to start a rally, but more likely to trade in a range.

Fundamentally, the news that U.S. shale production in May is set for its biggest monthly increase in more than two years as producers step up drilling activity is expected to keep the bearish pressure on prices.

Talk of an extension of the program to cut output may cause periodic short-covering rallies, but investors are beginning to doubt it will have any major effect on the global supply glut.