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

U.S. West Texas Intermediate and internationally favored Brent crude oil futures closed lower last week under relatively quiet trading conditions. Both futures contracts hit multi-month lows.

May WTI crude oil closed at $47.97, down $1.34 or -2.72% and June Brent crude oil ended the week at $51.95, down $1.03 or -1.98%.

Prices drifted lower last week in search of a balance point, closing down four out of five trading sessions. The stories driving the price action didn’t change much last week. Compliance with OPEC and non-OPEC member plans to cut production, trim the global supply and stabilize prices remained intact. At the same time, U.S. production continued to remain high, offsetting OPEC’s efforts.

Late in the week, the Saudis made a feeble attempt to spark a rally when they announced a cut in exports to the United States in March by around 300,000 barrels per day from February, but speculators didn’t bite on the news.

A plunging U.S. Dollar also had a limited effect on prices despite theoretically making dollar-denominated crude oil attractive to foreign buyers.

Hedge and commodity funds likely pulled back a little on their liquidation plans. At least that is what the price action is telling us.

At the end of the week, energy services firm Baker Hughes, Inc. said U.S. drillers added oil rigs for a tenth week in a row, doubling the rig count in ten-months. Drillers added 21 oil rigs in the week to March 24, the biggest weekly increase since the week to January 20, bringing the total count up to 652, up from six-year low of 316 in May 2016.

Forecast

All-in-all, it looks as if crude traders have become content with holding prices in a range once again, but this time at much lower prices than earlier in the year. And like earlier in the year, this may mean 8 to 12 weeks of consolidation before the next major move. During this time frame, we’re going to learn whether OPEC wants to extend its plan to curtail production, or if U.S. output will continue to remain steady, pushing supplies to new records.

If prices remain under pressure then this will indicate that investors are betting on increased U.S. production. If prices suddenly spike to the downside then this will indicate that investors are betting on the end of the OPEC deal. However, if there is a spike to the upside then this will mean an extension of the current deal to cut output beyond June is in the works.

A couple of OPEC members have already said they will support an extension of the plan, but it’s not really up to them. If there is going to be an extension then it is going to require major cooperation from the non-OPEC membership and a few of them haven’t really been compliant with the first deal.

Barring a few short-covering rallies, it looks as if lower prices are here to stay. The market is likely to find a few support zones at which prices will consolidate, but overall, I can see prices moving lower until the low prices begin to affect the profitability of U.S. producers.