Oil Price Fundamental Daily Forecast – Market May be Ripe for Short-covering Rally

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading slightly higher early in the session on Monday. In the absence of any major news over the week-end, the price action suggests that sellers are scarce and that aggressive counter-trend buyers may be stepping in to support the market.

Fundamentally, the market is still oversupplied and U.S. production has been relentless, but short-sellers may feel that there isn’t much downside potential at current price levels.

On Friday, July WTI Crude Oil closed at $45.83, up $0.19 or +0.42% and August Brent crude oil futures settled at $48.15, up 0.29 or +0.61%.

Despite the bearish fundamentals, the hedge funds and commodity money managers are at it again. According to the latest Commitment of Traders (COT) data released on Friday by the Commodity Futures Trading Commission (CFTC), large speculators added to their bullish net positions in the U.S. WTI crude oil futures market last week for a four consecutive week.

In other news, Baker Hughes reported on Friday that the number of active U.S. rigs drilling for oil climbed by 8 to 741 this week. This was the 21^st consecutive weekly rise. The total active U.S. rig count, which includes oil and natural gas rigs, increased by 11 to 927.

Forecast

As far as WTI crude is concerned, oversold conditions could trigger a short-covering rally today if the buying is strong enough to take out Thursday’s and Friday’s highs at $46.18. Aggressive counter-trend buying combined with buy stops could trigger a move into a major resistance target at $47.14.

Since the main trend is down and the fundamentals bearish, any rally into a resistance area is likely to be met by a fresh round of short-selling pressure.

The price action last week also suggests that buyers are coming in to defend the May 5 bottom at $44.13. With the market trading around $46.00, short-sellers are probably questioning the risk/reward of shorting at current price levels.

Without any major reports until late Tuesday’s American Petroleum Institute’s weekly inventories report and Wednesday’s U.S. Energy Information Administration’s report, it may actually be good to see a short-covering rally into these events.