Oil Price Fundamental Daily Forecast – Rangebound as Rising U.S. Production Continues to Offset OPEC Production Cuts

Prices are in a range because the major players aren’t convinced that the OPEC cuts will have an impact on the supply glut, especially with U.S. production continuing to remain at record highs. One energy expert said the production cuts would likely be “insufficient to mop up the inventories in the targeted three-month period till the end of the first quarter of 2019.”
James Hyerczyk
Crude Oil
Crude Oil

U.S. West Texas Intermediate and international benchmark Brent crude oil futures are trading higher early Wednesday. For a second consecutive session, the markets are trading inside last Friday’s wide range which tends to indicate trader indecision and impending volatility. The price action also suggests that investors may be taking some time to digest the impact of the OPEC-led decision to trim production by 1.2 million barrels per day starting January 1.

At 0836 GMT, February WTI crude oil is trading $52.24, up $0.40 or +0.77% and February Natural Gas is at $60.52, up $0.32 or +0.53%.

Prices rose nearly one-percent earlier in the session, but the big wave of buying that could’ve triggered a breakout to the upside failed to materialize. However, the markets continued to remain underpinned by expectations that the OPEC-led supply cuts would stabilize prices and trim the global supply glut.

In addition to the renewed optimism over the supply cuts, also supporting prices are the unexpected supply disruptions to Libyan oil exports. Over the week-end, local militia seized the country’s biggest oil field, El Sharara.

Finally, prices are also being supported by a recovery in U.S. equity markets, which were underpinned by reports that China was preparing to lower tariffs on automobiles. Additionally, President Trump told Reuters in an interview that trade talks with China were taking place to diffuse the trade disputes between the world’s two biggest economies.

In other news, the American Petroleum Institute (API) reported a huge crude oil inventory draw of 10.18 million barrels for the week-ending December 7. Analysts were looking for a draw of only 2.990 million barrels.

The API also reported a draw in gasoline inventories for the week-ending December 7 in the amount of 2.484 million barrels. Analysts were expecting a build of 2.461 million barrels for the week. Distillate inventories were up the same week by 712,000 barrels, compared to an expected build of 1.801 million barrels.

Early Tuesday, the EIA said the U.S. is set to end 2018 as the world’s top oil producer. It added that the nation’s annualized average output would be 10.88 million bpd over the year.

Forecast

Prices are in a range because the major players aren’t convinced that the OPEC cuts will have an impact on the supply glut, especially with U.S. production continuing to remain at record highs. One energy expert said the production cuts would likely be “insufficient to mop up the inventories in the targeted three-month period till the end of the first quarter of 2019.”

Analysts at FGE are saying that prices were “likely to hover in the $55-60 per barrel range for Brent, with WTI sitting some $5-10 per barrel below this, given current fundamentals”.

Furthermore, another oil analyst said prices are not likely to rise very much because of lingering uncertainties which include OPEC’s refusal to specify which country would cut how much.

Unless there is a major shift in demand which could come about if a trade deal is struck between the U.S. and China, or a massive unexpected supply outage, gains are likely to be capped over the near-term because U.S. oil production growth will probably continue to offset and supply side adjustments by OPEC and its allies.

I won’t be surprised by a short-covering rally. However, the move would likely be limited and likely met with renewed selling pressure since the hedge and commodity funds are still short crude oil.

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