U.S. West Texas Intermediate and international-benchmark Brent crude oil are trading lower early Monday, but continue to hover close to their nearly three-year highs reached earlier in the month. Despite the small setback, the markets should finish higher for a second consecutive month.
At 0633 GMT, June WTI crude oil is trading $67.84, down $0.26 or -0.38% and June Brent crude oil is at $74.17, down $0.47 or -0.63%.
Pressuring the markets early Monday is a rising rig count which could lead to higher U.S. production. The increase in the rig count tends to be bearish for oil prices because it usually leads to an increase in supply.
According to General Electric’s Baker Hughes energy services firm, U.S. drillers added five oil rigs in the week to April 27, bringing the total count to 825, the highest level since March 2015.
Additionally, U.S. crude production has soared more than 25 percent since mid-2016 to a record 10.59 million barrels per day (bpd). Only Russia currently produces more, at around 11 million bpd.
Helping to limit losses are a number of factors including a reported drop in Angola production, continued threats by Houthis to Saudi oil and shipping and infrastructure, but most of all the possibility of the reimposition of sanctions against Iran.
Forecast
The current price action suggests investors are waiting for news. After last week’s surge to the upside, WTI and Brent crude oil have moved sideways. Although the markets remained underpinned by the OPEC-led production cuts, it’s going to take a further cut in supply to sustain the current rally. Rising demand has also been helpful.
Hedge fund activity is likely to determine the size and duration of the next leg up. Recent data indicates they are firmly committed to the upside and in a position to take advantage of any bullish surprise events.
We’re going to maintain our upside bias, but also suspect we could see a near-term correction into a value area that would be attractive to the hedge funds.
President Trump has until May 12 to make a decision about Iran. Uncertainty could lead to a sideways-to-lower trade until then while a surprise early announcement would likely spike prices to the upside.