Oil Fundamental Analysis – Forecast for the Week of May 1, 2017

Crude oil prices declined last week to their lowest level in four, as growing U.S. production and indications of increasing global supply weighed on prices. Money managers continued to increase their bullish bets on oil, but the cuts by the world’s biggest exporters haven’t been enough to shrink stockpiles, leading some professional investors to trim positions.

June West Texas intermediate crude oil closed the week at $49.33, down $0.29 or -0.58%. Internationally-favored July Brent crude oil finished the week at $52.05, down $0.39 or -0.75%.

In addition to the crude oil supply glut, investors also had to worry about rising U.S. gasoline stocks in the wake of low demand from drivers.

Last week, investors were surprised by the inventories reports. On Tuesday, the American Petroleum Institute reported an estimated increase of 897,000 barrels in U.S. commercial inventories. However, the very next day, the U.S. Energy Information Administration reported a draw of 3.6 million barrels for the week to April 21.

Traders were looking for a decline in inventories of 1.6 million barrels. The API reported an increase and the EIA’s estimate fell short. This was enough to fuel offsetting moves in the market.

The EIA also reported that crude inventories stood at 528.7 million barrels. This figure was near the upper seasonal limit despite refineries increasing their runs after the end of maintenance season.

Refinery runs averaged 17.3 million barrels in the week to April 21, up 347,000 bpd on the previous week, with refineries operating 94.1 percent of capacity. Gasoline production averaged 9.7 million barrels, compared with 9.8 million barrels in the previous week.

Gasoline inventories increased by 3.4 million barrels and are still pressing their high level for the year. Distillates also increased 2.7 million barrels.

Crude oil did bounce back on Friday, but the market still finished lower for the week. This move was driven by the hope that OPEC might agree to extend production cuts long enough to reduce a global crude glut.

Finally, on Friday, oilfield services firm Baker Hughes reported that the number of active oil and gas rigs in the U.S. rose by 13 last week. The total oil and gas rig count in the U.S. is now at 870 rigs, or 450 higher than a year ago. This was the fifteenth straight build for oil rigs.

Forecast

Once again, next week’s price action is going to be dictated by how investors react to increasing U.S. production, rising gasoline inventories and reports of an extension of the OPEC-led production cuts.

If the U.S. production news is the catalyst then sellers are likely to go after the March bottom at $47.58. They’re going to try to set off sell stops established by the money managers. If successful, they could trigger a steep break.

I don’t think the news of an extension is going to be enough to turn this market around, but it is most likely to keep it in a range.