Oil Fundamental Forecast – March 30, 2017

U.S. West Texas Intermediate and internationally favored Brent crude oil futures closed at a three-week high on Wednesday after a government report showed inventories rose less than expected.  Traders also continued to react to supply disruptions in Libya and growing optimism that the OPEC-led output cut by major producing countries would be extended beyond the June deadline.

May WTI crude oil closed the session at $49.51, up $1.14 or +2.36% and June Brent crude oil ended the day up $1.00, or +1.94% at $51.42.

Fresh data from the U.S. Energy Information Administration (EIA) showed crude oil inventories rose 867,000 barrels in the week-ending March 24. This figure was nearly half of the 1.2 million barrel build that was expected. Traders attributed the lower build to ramped up processing by refineries after seasonal maintenance. Additionally, imports dropped and exports rose.

The EIA report also helped U.S. gasoline futures surge more than 2 percent to their highest in three weeks. It was helped by the inventories report that showed a 3.7 million-barrel drop in gasoline stocks last week, nearly 2 million barrels more than forecast.

Forecast

Although Libyan oil output is dropping about 500,000 barrels per day (bpd) due to the shutdown of pipelines from its biggest producing field, buyers have been a little tentative about playing the long side aggressively due to concerns over U.S. crude supply. Nonetheless, Wednesday’s price action shows that short-sellers are retreating, giving speculators room to inch this market higher until they run into the next major resistance.

I think the news has been strong enough to suggest support has been established and yesterday’s EIA report means that bullish traders have dodged another bullet for at least a week. Additionally, the steep drop in gasoline inventories, coming at the end of the refinery maintenance season, likely means curd oil inventories are on the cusp of declining. If this proves to be true then investors are going to shift their focus on OPEC and its ability to persuade its members and non-members to extend the output production program.

Look for shorts to continue to cover the rest of the week if the OPEC extension story starts to grow legs. Once again, I have to emphasize that the biggest move will come to the upside if Russia finally cuts production by its pledged amount of 300,000 barrels and it agrees to an extension.