Oil Monthly Forecast – May 2017

It was another poor month for the oil prices as what started off as a promising month in April turned out to be a large disappointment as the days progressed and now at the end of the month, we find ourselves at almost the same place where we began the month. But an even worser news for the bulls would be the fact that the oil prices have closed below the strong psychological mark of $50 for the month and this points to further weakening of the oil prices in the upcoming month.

Oil Breaks Through $50

The early part of the month was all good for the oil prices as the oil production cut agreement continued to proceed according to the plan and with it doing as good as it can, there were reports that the oil producers were very much inclined to continue the agreement beyond the middle of the year as they felt that it was able to achieve the target as far as increasing the oil prices were concerned and they were then able to push the prices towards the optimum levels that would help their economy. This helped the prices to climb above the $51 mark and continue their progress towards the $53 mark which was our first target.

The oil inventory data also showed a good drop as the build in the inventory was not as big as expected and this helped to push the oil prices further higher and easily achieve our target of $53. So, during the middle of the month, it looked as though the oil prices would range between the $53 and $55 mark which was what it was doing during the first couple of months of this year. But everything changed during the third week of the month as the oil inventory data showed a bigger than expected build and this put brakes on the solid bull run that was going on.

The oil prices crashed through $52 and $51 and it then consolidated for a brief while. The question was not only about the increasing oil inventory but it was more about what effect it would have on the rest of the demand and supply balance that was existing. With the increase in inventory, there would be a fall in prices and this would then trigger a rethink among the suppliers who would no longer be able to continue their production cut with the oil prices continuing to be low. So, this creates a cyclical effect and places into doubt on whether the oil producers would be able to continue the production cut beyond the middle of the year. So, this risk and uncertainty finally pushed the oil prices off the precipice as the prices then finally broke through the $50 mark and pushed down further towards the $48.5 mark where it found a bit of support.

Looking towards the month of May, it looks pretty bleak for the oil bulls as with the break through the $50 mark, the bear trend seems to be fairly well in place. We can now expect the prices to consolidate between the $47 and $50 mark and we do not expect any let up in the build up in the inventory data. Technically, a look at the charts shows us that the lows and highs of March were almost the same for February as well which shows a strong consolidation and ranging phase. A break in either direction could trigger a much larger move in that direction. The larger range sits between $47 and $55 but we do not expect the oil prices to come anywhere near the highs of this range for April unless something dramatic happens. It looks as though the risk is to the downside and hence the traders should be watching out for a break of $47. On the other hand, the range traders can wait for the price to reach somewhere close to $47 and then take a long in anticipation of a bounce back into range. For now, range trading seems to be the way ahead.

As far as economic events are concerned, we have noticed that any changes in the dollar fundamentals has done little to change the oil prices. The oil prices have been affected only by the inventory data and data from the OPEC oil producers and Russia. We expect more reports on what the oil producers are planning to do beyond May/June and this could be the key to determining the short and medium term trend in the oil prices.