Oil Fundamental Forecast – April 21, 2017

U.S. West Texas Intermediate (WTI) and internationally-favored Brent crude oil traded sideways to lower on Thursday after plunging nearly 4 percent the session before. The weak close has put the markets in a position to post their largest weekly decline in close to a month.

The catalyst behind this week’s selling pressure is concerns over whether an OPEC-led program to reduce production, trim the global supply and stabilize prices will restore balance to a market that has been beleaguered by oversupply for more than two years.

Although the markets were a little more stable on Thursday traders are still worried that the effort led by OPEC to cut production by almost 1.8 million barrels per day (bpd) during the first half of the year just may not be working.

This is being supported by fresh data from Thomson Reuters Eikon, which showed that a record 48 billion bpd of crude is being shipped across ocean waters in April, up 5.8 percent since December, before cuts were implemented.

The price action in Brent crude oil is also reflecting concerns over high supply. This is showing up in the value of the entire Brent forward curve which has slumped steadily since the start of the OPEC-led cuts in January. This is showing up in the two-year calendar strip for Brent futures, or the average of all contracts over that period. It is down by more than $4 since January to around $54.15 a barrel. Traders are saying that the high supplies are in part a result of other producers, who have not agreed to cut output, increasing exports.

In addition to the growing problems with the OPEC-led plan to cut production, the resurgence of U.S. shale production continues to weigh on prices. Prices could fall further if this trend continues.

OPEC producers including Saudi Arabia and Kuwait are lobbying to get other OPEC members and non-members to extend the plan to cut output, but at this point, it doesn’t look like their intent will be to cut the global supply glut, but to stop it from growing further.

Forecast

Technical factors are also playing in major role in the crude oil at the close of the week. The March to April rally was $47.58 to $54.14. The 50% to 61.8% retracement zone formed by this range is $50.85 to $50.08. The market is currently testing this zone.

Trader reaction to $50.85 and $50.08 will set the tone for the market over the near-term. If the bearish news continues to build then look for sellers to take out $50.08. This could trigger another plunge in the market.

Profit-taking, short-covering or even surprise bullish news could trigger a move over $50.85. This could trigger a near-term rally, but it is likely to be capped at $52.33 to $52.75 in the best case scenario.