Oil Price Fundamental Daily Forecast – U.S. Firms May Have to Cut Output to Trim Supply, Stabilize Prices

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are drifting lower on below average volume shortly ahead of the regular session opening. The price action suggests the hedge and commodity funds may be on the sidelines ahead of Tuesday’s Christmas holiday. This could lead to a tight trading range and extremely low volume. However, we also have to be on the lookout for exaggerated price swings due to rogue traders trying to take advantage of the trading conditions.

At 1030 GMT, February WTI crude oil is trading $45.46, down $0.13 or -0.29% and February Brent crude oil at $53.73, down $0.09 or -0.17%.

New Concerns for U.S. Drillers?

Earlier in the session, prices rose with some traders saying the move was caused by reports that U.S. shale oil producers are planning to curtail drilling plans for next year. However, this wasn’t evident last week as General Electric’s Baker Hughes energy services firm raised the number of active U.S. rigs for drilling oil by 10 in the week-ended December 21 to 883.

Based on past performance of the drillers, one of best moves U.S. firms could implement to drive up prices is to cut back on output. They’ve done it in the past with success so if prices continue to fall then this is likely to be their first step in stabilizing inventories and prices. However, until we see a trend develop, it’s all speculation.

Little Control Over Global Demand

Another concern for oil producers is the weakening macroeconomic picture and its impact on oil demand. With the drop in global equity markets pointing toward a recession, oil producers are expecting slowing trade flows. Oil producers have little control over lower global demand so their best move will be to curtail production. OPEC and its allies will be cutting production by 1.2 million barrels per day starting January 1 so they are doing their part to try to stabilize prices. This move is not likely to work unless the U.S. also takes moves to trim supply, or OPEC gets more aggressive.

OPEC May Hold Extraordinary Meeting

According to reports, OPEC and its allies are prepared to hold an extraordinary meeting in Baku in late February or early March if their production cuts don’t trim the supply glut or stabilize prices. The theme of the meeting is expected to be “price stability at all cost”.