Oil Fundamental Forecast – January 19, 2017

Crude oil futures closed lower on Wednesday as investors responded to a rebound in the U.S. Dollar and concerns over increased production in the U.S. rather than OPEC’s forecast for increased demand.

U.S. March West Texas Intermediate crude oil futures closed at $52.18, down $1.08 or -2.03%.  International Brent crude oil finished at $54.27, down $1.20 or -2.16%.

According data from the U.S. Energy Information Administration, U.S. shale production is set to break a three-month decline in February. The EIA predicts February production will edge up 40,750 barrels per day (bpd) to 4.748 million bpd. In January it was expected to drop by 5,900 bpd.

OPEC, on the other hand, signaled it anticipated a drop in the oil surplus in 2017 due to compliance with its plan to cut production. However, it also pointed to a possible rebound in U.S. output due to increasing U.S. prices.

The U.S. Dollar rallied on profit-taking and short-covering after a steep decline earlier in the week. Helping to boost its value was a report showing a solid increase in consumer inflation and hawkish commentary from Fed Chair Janet Yellen.

In other news, the American Petroleum Institute (API) reported a larger than expected draw in commercial crude supplies in its weekly report. The API reported a 5.042 million barrel decline in inventories versus an expected one-million barrel draw down.

This was helped by a steep decline at the Cushing, Oklahoma hub with supplies falling twice as much as expected with a draw of one million barrels.

Gasoline inventories surprised with a 9.75 million barrel increase.

Forecast

On Thursday, investors will get the opportunity to respond to the latest weekly inventories data from the EIA. The report covering the week-ending January 13 is expected to show an increase of 100,000 barrels. During the week-ending January 6, inventories increased by 4,100,000.

A trade through $51.59 will signal a resumption of the down trend with $51.43 to $50.29 the next major downside target zone. We’re looking at $52.63 to $52.96 as the next short-term upside target.

We’re expecting a possible countertrend rally on Thursday due to oversold conditions but the main influence will be the direction of the U.S. Dollar and the EIA report.