Oil Price Fundamental Daily Forecast – End of Trade Talk Optimism May Encourage Profit-Taking

Concerns over rising U.S. production and the end of the trade talks could begin to weigh on crude oil prices. However, don’t think of these as bearish developments. If OPEC and Russia continue to stay the course and reduce supply then this event is likely to continue to underpin prices.
James Hyerczyk
Crude Oil
Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower early Thursday on profit-taking and position-squaring in response to concerns over increasing U.S. supply and the outcome of three-days of trade negotiations between the United States and China. Caution and “risk-off” seem to be the early themes.

At 0853 GMT, March WTI crude oil is trading $52.02, down $0.67 or -1.27% and March Brent crude oil is at $60.71, down $0.73 or -1.19%.

Rally May Be Over-Cooked

Yesterday’s over 5-percent gain in WTI and over 4-percent jump in Brent crude oil may have put a short-term cap on the rally because it put the markets into over-valued territory given the current fundamentals. This could be setting up the markets for a short-term pullback into a value area, while giving traders another chance to reassess the fundamental outlook.

This is a normal move because following a prolonged move down in price and time, short-sellers build a huge position. The first rally from a major bottom usually takes out the weaker shorts. The next move down is usually about half of the short-covering rally. If this occurs then this will offer new buyers a chance to buy at relatively cheaper prices on the hopes that the fundamentals turn bullish. I suspect that this is what we’re going to see over the near-term.

U.S. Energy Information Administration Report

On Wednesday, the EIA reported a 1.7 million barrel dip in crude inventories for the week-ending January 4. This took total inventories to 439.74 million barrels, slightly above their five-year seasonal average of 435 million barrels. This figure came in lower than the -2.4 million barrel forecast.

While the crude numbers were “ok”, short-sellers and profit-takers were expressing concerns over the refined fuels data. Gasoline stocks rose 8.1 million barrels, to 248.1 million barrels, marking the largest weekly rise since December 2016, the EIA said. Additionally, distillate stocks swelled by 10.6 million barrels, to 140.04 million barrels.

Positive Effects from Trade Talks May Wear Off

Throughout the week, optimism over the outcome of the U.S.-China trade talks helped underpin crude oil prices. However, this small taste of euphoria may already be wearing off. Traders think it’s good news that the meeting ended with the groundwork being laid for future meetings, however, if you read between the lines, there are still some major challenges ahead. This could weigh on prices over the near-term.

Forecast

Concerns over rising U.S. production and the end of the trade talks could begin to weigh on crude oil prices. However, don’t think of these as bearish developments. If OPEC and Russia continue to stay the course and reduce supply then this event is likely to continue to underpin prices. The issue lies with value. Furthermore, we have to see evidence that the hedge fund have been reducing short positions and increasing long positions. Until then, we can’t be confident that a change in trend is taking place.

Ideally, we’d like to see a pullback by WTI into $47.77 to $46.57 and by Brent into $56.00 to $54.65.

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