Oil Price Fundamental Daily Forecast – Set Up for Classic “Buy the Rumor, Sell the Fact” Situation

Crude oil prices are trading slightly higher while hovering near yesterday’s high early Thursday ahead of the planned OPEC meeting later in the day. The price action suggests investors are expecting OPEC and other major producers to extend a production cut aimed at tightening supply into at least March 2018.

On Wednesday, July West Texas intermediate crude oil settled at $51.36, down $0.11 or -0.21% and internationally-favored August Brent crude oil closed the session at $54.24, down $0.17 or -0.31%.

The price action since early May has been bullish with the markets rising more than 16 percent since their May 5 bottom. Since this day, a strong consensus has developed that producer supply cuts will be extended. The only question remains will it be six months or nine months.

Most traders are betting on the nine month extension since this is what the Saudis and Russians agreed to a little over a week ago. There was also talk earlier this week that Iraq is also in favor of a nine month extension.

In other news on Wednesday, prices fell slightly as investors reacted to the latest weekly U.S. inventories data.

According to the U.S. Energy Information Administration (EIA), crude inventories fell 4.4 million barrels in the week-ended May 19, higher than analysts’ forecast of a 2.4 million barrel decline. This marked the seventh straight week as refiners processed a near-record amount of crude last week.

Gasoline and distillates also dipped, but gasoline inventories fell by only 787,000 barrels, compared with expectations for a 1.2 million barrel draw.

Forecast

The current price action indicates that an extension has been priced into the market. Therefore, unless we see the announcement of a deepening of the production cuts, we’re likely to experience a wicked two-sided trade then possibly a lower-close. I expect to see a classic, “buy the rumor, sell the fact” reaction to the announcement of an extension.

We could see further profit-taking over the near-term if the OPEC-led meeting concludes with the participants agreeing to the extension and a “wait and see” attitude in order to determine the impact of the extension on prices.

We should see a spike to the upside if a decision is made to cut production deeper than the current 1.8 million barrels per day.