Oil Price Fundamental Daily Forecast – Buyers Betting on Deeper Production Cuts

U.S. West Texas Intermediate and internationally-favored Brent crude oil futures are trading higher early Monday. The markets are being supported by reports that the next move to trim supply and stabilize prices by OPEC and other major non-OPEC producers will include an extension into next year and deeper production cuts.

July WTI crude oil futures are trading $51.13, up $0.46 or +0.91%. August Brent crude oil futures are trading $54.21, up $0.45 or +0.84%.

Both futures contracts are extending the rally from May 5.

Futures prices were lifted early last week when Saudi Arabia and Russia said they would extend their current production cuts into March 2018. The rally was further supported as other oil producers said they would agree to an extension.

It looks as if investors have already priced in an agreement of an extension at its May 25 meeting. However, the driving force behind the current rally is the strong possibility of even deeper production cuts.

According to news sources, the option of deepening the production cut is also expected to be discussed. This is underpinning the markets early Monday.

Most traders feel that deeper cuts may be needed to rein in the oversupply because soaring output from the United States has undermined OPEC’s efforts to tighten the market so far this year.

Although traders are primarily responding to the news of a possible deepening of production cuts, traders should be aware that there are still some negatives in the market that could cap today’s gains. These include the latest rig count and worries over U.S. production.

Last Friday, Baker Hughes announced that the U.S. oil rig count rose again last week. The rig count has added 404 oil rigs since May last year, a rise of 128 percent.

Additionally, U.S. oil production has already risen by 10 percent, or almost 900,000 barrels per day, since mid-2016 to 9.3 million bpd.

Look for a firm tone today as long as WTI crude remains above $50.51 and Brent holds above $53.41. A break back below these levels may not mean the trend is changing, but it will indicate the selling is greater than the buying at current price levels. Any weakness is likely to be triggered by profit-taking and position-squaring ahead of the OPEC meeting on May 25.