Oil Monthly Forecast – February 2019

Crude Oil closed positive in January 2019 having suffered sharp losses and closing in red on all three months of 3^rd quarter in FY2018-19. Having hit 4 years high at $77.06 per barrel just at the start of Q3 FY2018-19, crude oil suffered sharp losses and moved back near yearly lows to $42.20 per barrel down by 45.24% on event-driven price action during December 2018. While the factors that drove price action during the month of January 2019 were same crude oil price managed to gain nearly 18% as the trading session came to a close. Price of US crude oil in spot market managed to breach critical resistance level at $50 and move as high as $55 per barrel having managed to establish a stable rally above $50 price mark. The price action of crude oil in the global market is currently influenced by China-U.S. trade war and this acts as the major driving force of both bulls and bears. However, production and supply cut imposed by OPEC + members during their meeting in December 2018 which came into effect from New Year continues to provide solid support to bulls preventing sharp loss and major moves to the downside. While a look at the weekly chart will show that crude oil price saw steady growth and positive price action across the month of January, a look at the daily chart will show that price action was highly volatile with bears fighting for control at every single turning point across the month.

This goes to show that despite positive price action crude oil currently lacks enough support for bulls to establish and sustain a positive price rally had it not been for news driven momentum. The first two week of January saw crude oil price gain sharply supported by optimism surrounding Sino-U.S. trade talks with hopes for positive outcome between two nations as headlines hinted at progress during face to face meeting between representatives of two nation during their meeting in China and macro data outcome which hinted that production and supply cut enforcement decided upon by OPEC+ members had come into effect in global crude oil market. These two factors helped crude oil breach critical support level of $50 handle by the start of the second week and establish a sustained rally above $50 price level which continued for the rest of the month. The price action was range bound during the third and fourth week of January. The third week started on dovish note owing to disappointing Chinese trade data. China is the top importer of crude oil in the global market and hence any headline that affects the Chinese economy has a direct impact on crude oil price action across major global markets. Crude oil price action was further weighed down by disappointing Chinese GDP data and revised IMF growth forecast which hinted at a slowdown in global economic growth during 2019. A slowdown in global economic activity and growth would mean less industrial activity and in turn, less demand for crude oil which was viewed as a major red flag by the global market.

Sino-U.S. Trade Talk Headlines Dominated Price Action of Crude Oil

However conflicting headlines relating to China-U.S. trade talks and reports of U.S. officials considering a reversal of tariff on Chinese import goods in a bid to ease the impact of trade war on US economy and help close a trade deal with China helped Crude oil bulls maintain price action above $50 handle. Further OPEC’s enforcement of reduction in crude oil production and supply in global markets greatly helped reduce glut scenario in the market and prevent a sharp decline in crude oil price action. Meanwhile, reports of US Crude oil inventory stockpile showing a considerable increase in value in both EIA & API readings, despite forecasts hinting at a draw in stockpiles suggested that production activities remained at a record high in the U.S.A. However, crude oil price managed to go as high as $54 per barrel mid-month as headlines hinted that Chinese state council has decided to take measures which will help improve economic conditions in China and recover from losses incurred during early days on an ongoing trade war with the US by the first quarter of 2019. However steady supply which met demand in the market resulted in crude oil price remaining in range bound action.

Crude oil bulls were further supported in the fourth week on headlines which stated that Chinese finance ministry would step up fiscal spending this year to support its economy which is interpreted in broad market as hopes for steady demand of crude oil in China. Further news of possible US sanction on Venezuela’s crude oil exports hit the market given current political unrest in Venezuela. The main importer of Venezuelan crude oil is the U.S. but their production has already gone down by half owing to the power struggle in the country resulting in its clients seeking an alternative source for crude oil imports. Crude Oil price breached $55 per barrel during last week of January as the US formally announced imposing tariff on Venezuelan crude oil market. The crude oil price fell soon after the report as data hinted that U.S. stockpiles continued to rise despite supply reduction from Saudi Arabia which suggested production from the U.S. was enough to meet with local and international demand while offsetting supply outage of Venezuelan Crude oil. Further news that U.S. energy firms added rigs for the first time this year also weighed on crude oil price action. However, data soon suggested that Venezuelan sanctions are having a visible impact on market and headlines of progress in high-level talks between China & U.S.A also supported Crude oil bulls helping Crude oil close positive for the month. However, the outlook for China & U.S. trade talks still looks gloomy as the deal has been postponed till late February when China & U.S. Presidents are set to meet face to face.

Headlines Driven Momentum To Rule Market Across February

Further production from the U.S. still remains high and there is a high probability that U.S.A could fill in any supply gap created owing to Venezuelan sanctions in a bid to keep crude oil price as low as possible. This has created a scenario where crude oil market lacks necessary fundamental support to sustain positive price rally across February. Meanwhile technical perspective also paints clouded picture as the price is below 100 day MA in daily chart while above 20 and 50 MA’s and both momentum indicators RSI & Stochastic moving with upward incline but yet to cross above overbought territory which suggests bullish price action may continue in short term but there is strong resistance for bulls in medium-term outlook. While positive price action may continue in the month ahead it is unlikely to breach $60 handle from technical perspective and bulls require additional strength to maintain solid price rally which is expected in form of news driven momentum in the month ahead.