Oil Price Fundamental Daily Forecast – Rebalance May Be Under Way

U.S. West Texas Intermediate and international-benchmark crude oil futures are trading flat early Monday. There has been no follow-through to the upside after Friday’s strong rally, which suggests the move may have been fueled by short-covering rather than aggressive buying.

At 0417 GMT, October WTI crude oil futures are trading $48.67, up $0.01 or +0.02% and November Brent crude oil is trading $52.40, down $0.01 or -0.02%.

Friday’s rally represented a 50% to 61.8% retracement of the recent sell-off. The markets are currently testing key areas on the charts. Trader reaction to these areas will determine the near-term direction of the market.

Aggressive counter-trend sellers are going to try to stop the rally in an effort to form a potentially bearish secondary lower top. Buyers are going to try to drive the market higher in order to form a new higher bottom.

Fundamentally, rising U.S. output is weighing on hopes the market will tighten after a 13 percent decline in U.S. crude inventories since March. Last week, the U.S. Energy Information Administration reported that U.S. production is now up to 9.5 million barrels per day (bpd), its highest level since July 2015.

There is hope, however, that production may begin to decline. Energy services firm Baker Hughes reported on Friday that energy firms cut rigs drilling for new oil for a second week in three. Drillers cut five oil rigs in the week to August 18, bringing the total down to 763.

There are signs that the rebalance of the oil market is under way, however, traders appear to be too focused on the fact that shale supply continues to increase.

If traders continue to ignore the downtrend in crude inventories than we could remain rangebound. If they start to recognize the trend, the market could find support. Bearish sentiment seems to have finally turned and there is evidence that buyers are coming in on weakness.

The hedge funds are long but the market is not saturated with bullish traders. However, the recent price action suggests there is no strong commitment to either side of the market.

In order to get this market rolling to the upside, the hedge funds are going to have to start buying strength. Otherwise, we’re going to remain rangebound over the near-term.