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

U.S. West Texas intermediate crude oil and international Brent crude oil started the week lower as investors continued to respond to the previous week’s steep decline fueled by massive hedge fund liquidation in reaction to rising U.S. supply. However, later in the week, the markets stabilized and rallied after the report of a surprise inventory draw, friendly comments from the International Energy Agency and a weaker U.S. Dollar.

May West Texas Intermediate crude oil closed the week at $49.31, up $0.28 or +0.57%. June Brent crude oil finished at $51.95, up $0.32 or +0.62%.

Crude oil prices rose more than 2 percent on March 15, lifted by a surprise drawdown in U.S. crude inventories. Data from the U.S. Energy Information Administration (EIA) showed U.S. crude stocks fell last week, dropping after nine consecutive increases.

The weekly EIA report showed inventories fell by 237,000 barrels in the week to March 10, compared with analysts’ expectations for an increase of 3.7 million barrels.

Also underpinning crude oil was data from the International Energy Agency (IEA) suggesting OPEC cuts should create a crude deficit in the first half of 2017.

The IEA said global inventories rose in January for the first time in six months despite OPEC output cuts, but said if it stuck to its production curbs, the market should see a deficit of 500,000 barrels per day (bpd) in the first half.

Finally, dollar-denominated crude oil prices extended their gains after the U.S. Federal Reserve raised interest rates in a highly expected move, but drove the U.S. Dollar sharply lower against a basket of currencies after the Fed’s monetary policy statement and economic projections were less-hawkish than expected.

Forecast

Crude oil prices could remain steady this week if buyers react to the IEA projections and the sellers continue to react to the global supply overhang. Crude could remain in a narrow range, much like last week if investors continue to weigh the impact of the first oil cut from OPEC against the rising U.S. shale oil output and high inventories.

The market may continue to find resistance at former support levels. These levels will be difficult to overcome in the short-run without a significant drawdown in inventories. And the potential for increased U.S. production continues to build with Baker Hughes reporting a 14 drilling rig increase last week.

The bias is still to the downside with potentially bullish comments from Saudi Arabia Minister Khalid al-Falih failing to move prices higher with his talk of a possible extension of the plan to cut output. However, if OPEC and other non-OPEC members decide to announce formal talks over extending the program then I think oil could rise $5.00 to $7.00 over a short period of time.