Oil Fundamental Forecast – April 27, 2017

Crude oil futures finished mixed on Wednesday as investors reacted to a surprise draw in U.S. inventories, but remained concerned over the global supply glut.

U.S. June West Texas Intermediate crude oil futures finished the session slightly higher at $49.62, up $0.06 or +0.12%. Internationally-favored July Brent crude oil closed at $52.41, down $0.16 or -0.30%.

On Wednesday, traders initially drove prices higher from their intraday lows after U.S. data showed refiners used up more crude oil than ever from storage tanks, drawing down stockpiles. However, prices weakened into the close as falling gasoline prices weighed on the crude oil market.

Based on the government report, we can conclude that refineries returned from maintenance season, increased runs to an all-time modern record for crude processing, and turned the crude oil surplus into petroleum products.

The U.S. Energy Information Administration supported this conclusion when it reported that U.S. crude inventories fell 3.6 million barrels last week. The draw was significantly more than analysts and traders were expecting and completely opposite from the nearly 900,000-barrel build reported late Tuesday by the American Petroleum Institute.

The EIA report also showed that refiners processed nearly 17.3 million barrels of oil a day last week – the highest ever recorded in EIA data. Refinery utilization of 94.1% was the highest level for this time of year since April 2001.

Crude oil prices initially rose on the surprise drawdown, but gains were capped when traders realized that the gasoline output was far greater than the demand. According to the EIA, gasoline stockpiles grew by 3.4 million barrels the week-ending April 21. Diesel stockpiles also increased unexpectedly, rising by 2.7 million barrels.

Forecast

Although the crude oil surplus has been narrowing in April, the gasoline supply has been increasing. This should keep a lid on crude oil prices. However, if crude inventories start to climb again, then combined with rising gasoline stocks, we could see another plunge in prices.

Additionally, a jump in oil imports and indications that the global supply glut is not decreasing as rapidly as desired, likely means crude oil could have trouble sustaining a rally over $50.

The OPEC-led output cuts were supposed to accelerate the decrease in the global supply glut, but the data suggests it isn’t working. Even if OPEC decides to extend the program, it’s still going to be a long time before we see an accelerated drawdown in U.S. inventories.

The chart pattern suggests that buyers may be defending the March bottom at $47.58, however, it’s still within target. I can’t build a case for higher prices unless the WTI contract can overcome $50.86 over the near-term.