Oil Fundamental Forecast – February 27, 2017

Crude oil futures fell on Friday as investors booked profits ahead of the week-end. The lack of fresh news also helped the market remain inside its two-year range.

U.S. April West Texas Intermediate crude oil finished the session at $53.99, down $0.46 or -0.84%. International April Brent crude oil closed at $55.99, down $0.59 or -1.04%. We’ll be rolling over to Brent’s May contract on Tuesday.

On Friday, oilfield service firm Baker Hughes reported its weekly count of U.S. oil rigs topped 600 for the first time since October, 2015. Last week, drillers added 5 oil rigs.

Forecast

Crude oil futures are expected to open inside the same $5.00 range it has respected since November, however, there seems to be a slight upside bias forming. This is no surprise since recent data shows hedge and commodity funds holding record long positions. Also supporting the upside bias is the fact that both WTI and Brent crude prices have firmed for five out of the last seven sessions.

The price action clearly shows that buyers are coming in on the breaks and sellers are coming in on the rallies. As traders, we’ve gotten used to this chart pattern, so as speculators we have to start watching for a shift in the pattern to indicate a possible change in investor sentiment. For example, we haven’t really seen a lot of investors buying strength.

With the market straddling the upper end of the trading range, we may have to start watching for a possible breakout over the high end of the range.

We’ve gotten used to seeing tops put in because of rising U.S. production and bottoms reached because of increasing compliance with OPEC’s plan to cut output. It should be noted that last week’s EIA data showed stocks rose 564,000 barrels to 518.7 million barrels. However, this was the lowest increase over the past couple of months.

We can build a case for higher prices over the near-term if the trend of lower imports and smaller gains in inventories persist over the coming weeks. This would strongly suggest that the OPEC led production cuts are starting to have an impact.

While this news would likely lead to a steady rally, the current chart pattern suggests the crude oil market may have to spike higher to draw the attention of fresh buyers. The market needs these momentum traders to drive it out of the trading range.

Breakouts to the upside are usually caused by surprise news. If I could predict this then it wouldn’t be much of a surprise. However, I can say with confidence that if this market is getting ready to breakout over the top end of the range then the news is likely to be related to reports of increased production cuts from the United Arab Emirates, Iraq or Russia. These three countries are the wildcards that could push the market over the top.