Oil Price Fundamental Daily Forecast – May Need Surprise Event to Fuel Short-Covering Rally

U.S. West Texas Intermediate and international-benchmark Brent crude oil are trading nearly flat early Thursday while consolidating for fourth consecutive session. Prices are being underpinned by the OPEC-led production cuts announced last Friday that are designed to stabilize prices and reduce excess supply. The markets are also being supported by signs of easing trade tensions between Washington and Beijing and a government report showing a drawdown in U.S. inventories.

At 0841 GMT, February WTI crude oil is trading $51.36, unchanged and February Brent crude oil is at $60.12, down $0.03 or -0.05%.

Helping to cap gains are concerns that rising U.S. production may offset the benefits from the OPEC-led production cuts, expectations of lower demand, and a strong U.S. Dollar.

China Buys Soybeans

In a sign that the tensions over the trade dispute between the United States and China may be easing, the world’s second-largest economy purchased U.S. soybeans for the first time in more than six months. Earlier in the week, China announced that it would be reducing tariffs on U.S.-made automobiles. This news helped drive up demand for risky assets while supporting crude prices.

EIA Report

On Wednesday, the U.S. Energy Information Administration (EIA) reported crude oil inventories in the United States had gone down by 1.24 million barrels in the week to December 7, the second weekly draw after a string of weekly increases. Trader reaction to the draw was muted, however, because the actual figure came in below the 3.0 million barrel estimate.

The EIA also said inventories had gone up by 2.1 million barrels in the first week of December, with daily production at 10.5 million barrels, versus 9.7 million bpd a week earlier. The daily production rate of distillate fuel was 5.5 million barrels and an inventory decline of 1.5 million barrels. A week earlier, refineries produced 5.6 million bpd of distillate fuel. In total, refineries last week processed 17.4 million bpd of crude, down from a week earlier.

OPEC Says Demand Will Fall

In other news, OPEC said demand for its crude in 2019 would fall to 31.44 million barrels per day (bpd), 100,000 bpd less than predicted last month and 1.53 million bpd less than it currently produces.

Forecast

The price action this week suggests the short-term fundamentals may be balanced at this time. However, this type of consolidation suggests investor indecision and impending volatility. In other words, traders may be waiting for an event to trigger the next major move.

On the bullish side, the news could come in the form of an unexpected supply disruption, or an unexpected jump in future demand, which could be tied to a further easing of U.S.-China trade relations.

Money managers have reduced their long positions on both Brent and WTI to three-year lows since the beginning of December. Contrary thinking suggests that this may actually be a potentially bullish indicator since any surprise event concerning a reduction in supply, or increased demand is likely to fuel a strong short-covering rally.