Oil Price Fundamental Daily Forecast – Look for Late Session Volatility With Release of Weekly API Report

U.S. West Texas Intermediate and international-Benchmark Brent crude oil futures are trading lower on Thursday, but inside yesterday’s wide range. The price action suggests investor indecision. The lack of follow-through to the upside also indicates that yesterday’s huge rally was primarily fueled by profit-taking and short-covering due to the massive gains in the U.S. stock markets.

At 1158 GMT, February WTI crude oil is trading $45.40, down $0.83 or -1.80%. March Brent crude oil is at $53.83, down $0.94 or -1.72%.

There were no changes in the fundamentals on Wednesday to support a continuation of the rally. Furthermore, without a support base, buyers are going to be reluctant to take a position for a longer-term rally. A few of the weaker shorts may have covered their positions yesterday, but the major hedge funds continue to hold major short positions, betting on further downside pressure.

Oversupply Still the Major Concern

Although Wednesday’s recovery was impressive, it had very little impact on the structure of the market. Today’s early price action suggests that traders may have already forgotten about the move with their renewed concerns over the supply glut and concerns that a weakening domestic and global economy will lead to lower demand.

Planned Production Cuts to Begin Next Week

Traders seem to be taking a “wait-and-see” approach towards the start of the OPEC-led production cuts on January 1. Saudi Arabia and its allies including Russia are expected to trim 1.2 million barrels per day (bpd) from output. However, there are still some doubts over whether this move will be enough to fuel a rally or at the very least stop the losses. In the meantime, U.S. producers who are not part of the deal, continue to pump about 11.6 million bpd of crude more than both the Saudis and the Russians.

Other News

Although U.S. sanctions have put a cap on Iran’s oil sales, Tehran has said its private exporters have “no problems” selling its oil. This is adding to the global supply glut.

Forecast

With the traditional fundamentals still weak, crude oil is likely to continue to feel downside pressure. Of course, another steep recovery in the stock market will likely trigger another short-covering rally. However, without a support base, gains are likely to be limited.

Although the sell-off in the stock market has contributed to the weakness in crude prices, the unbalanced supply-demand situation is the real reason for the weakness. Until this situation improves, we can’t really say crude oil has bottomed.

Reports

Later today, the American Petroleum Institute will release its weekly inventories report so we could see some late session volatility. On Friday, the U.S. Energy Information Administration will release its weekly data. The report is expected to show a decline of 2.7 million barrels during the week-ending December 21.