Oil Price Fundamental Weekly Forecast – Economic Growth Concerns Outweighing OPEC-Production Cut Extension

U.S. West Texas Intermediate and international Brent crude oil futures posted their biggest weekly losses for the year last week with most of those losses attributed to a steep decline on May 23, which produced the worst single-day performance in 2019. Traders said the weakness was fueled by concerns over rising U.S. stockpiles and worries that the U.S.-China trade standoff has finally hit the U.S. economy.

Last week, July WTI crude oil settled at $58.63, down $4.29 or -6.82% and August Brent crude oil closed at $67.47, down $3.79 or -5.62%.

Bearish Factors

Rising U.S. Production and Increasing Stockpiles

A jump in U.S. crude inventories primarily caused by low refinery runs helped drive prices lower. According to the Energy Information Administration (EIA) weekly inventories report, U.S. crude stockpiles soared to their highest levels since July 2017.

The EIA data showed commercial U.S. crude inventories rose by 4.7 million barrels in the week ended May 17, to 476.8 million barrels. The government also reported that U.S. crude oil production climbed by 100,000 barrels per day (bpd) to 12.2 million bpd. Last month, production hit a record 12.3 million bpd.

Weak refinery demand and the planned sale of U.S. strategic petroleum reserves (SPR) into the commercial market have also set up crude for its worst weekly performance in 6 months.

Fear of Weakening U.S. Economy

There is now evidence that the impact of the U.S.-China trade dispute is affecting the U.S. economy. This came to the surface on May 24 with the release of the weaker-than-expected Flash U.S. Manufacturing and Services PMI data. This raised concerns over lower future demand on top of steadily rising U.S. stockpiles and production.

Additionally, the supply glut has spread outside of the U.S. and is now affecting other countries. According to reports, Asian refinery margins this week fell to their lowest seasonal levels since at least the financial crisis a decade ago, triggering plans for refinery run cuts.

Bullish Factors

OPEC-led Supply Cut Extension

The OPEC-led supply cuts have been the primary driver of this year’s rally. So the possible extension of the production curbs could be the catalyst that triggers a resumption of the move. However, since the coalition is not scheduled to meet until the end of June, WTI and Brent prices could flounder for another month.

At the start of the week a rally was fueled by comments from Saudi Energy Minister Khalid al-Falih after he said on May 19 there was a consensus among OPEC and other non-OPEC producers to drive down crude inventories “gently”, but his country would remain responsive to the needs of what he called a fragile market.

In other news, energy services firm Baker Hughes reported that the number of active U.S. rigs drilling for oil fell by 5 to 797 this week. That followed declines over each of the last two weeks. The total active U.S. rig count, meanwhile, fell by 4 to 983.

Weekly Forecast

I’m not convinced that all of last week’s selling was related to concerns over rising stockpiles and possibly lower demand in the future. I think a lot of the move was fueled by technical factors such as sell stops under the 200-day Moving Average.

Hedge and commodity fund money managers like to place stops under the 200-day Moving Average and when the manufacturing PMI report came in lower-than-expected on May 23 they were forced out of the market.

If the steep break was mostly fueled by sell stops then prices should retrace back to the 200-day moving average over the near-term. At that point, traders are going to have to decide whether to continue the rally, or start shorting the market.

Prices are likely to continue to be supported by the OPEC-led supply cuts and especially talk of an extension of that strategy. However, gains will be limited by rising U.S. stockpiles. On the bullish side, I doubt that Saudi Arabia will step up production given the recent slump in prices.

Any new shorting pressure will be initiated by weaker-than-expected U.S. economic data. This week, the key report is Preliminary GDP. It is expected to come in at 3.1%, down from 3.2%. A number under 3.0% could fuel another steep break.