Oil Price Fundamental Weekly Forecast – Geopolitical Tensions, Tight Global Supplies Mean Elevated Volatility

After four weeks of consolidation, crude oil futures surged to the upside last week, driven by a solid combination of technical and fundamental factors. The upside momentum created by the move drove Brent to a new high for the year. West Texas Intermediate finished slightly below its high for the year.

May WTI crude oil settled at $65.88, up $3.47 or +5.56% and June Brent crude oil closed the week at $69.81, up $3.76 or +5.69%.

The key fundamental factors driving the price action last week were Middle East tensions, worries about Venezuela’s production slide, a surprise decline in U.S. inventories and speculation that the OPEC-led production cuts would be extended into 2019.

Traders paid little attention to forecasts of increased U.S. production and an increasing rig count.

Speculation that the United States may reimpose sanctions on Iran helped boost prices because this would lead to a disruption of supply.

According to the U.S. Energy Information Administration (EIA), crude oil inventories declined 2.6 million barrels the week-ending March 16. Analysts were looking for a 2.5 million barrel build.

The EIA also reported a 1.7-million-barrel drop in gasoline inventories. Gasoline production averaged 9.9 million barrels in the week to March 16, with refineries operating at 91.7 percent of capacity and processing 16.8 million barrels of crude daily.

Additionally, crude imports dropped by half a million barrels per day, that contributed to the draw. Exports were up slightly.

Finally, Saudi Arabian Energy Minister Khalid al-Falih, said that OPEC members will need to continue coordinating with Russia and other non-OPEC oil-producing countries on supply curbs in 2019 to reduce global oil inventories.

Al-Falih said, “We know for sure that we still have some time to go before we bring inventories down to the level we consider normal and we will identify that by mid-year when we meet in Vienna. And then we will hopefully by year-end identify the mechanism by which we will work in 2019.”

Weekly Forecast

The strong close last week suggests momentum is on the side of the bullish traders so we have to assume that this upside pressure will continue until a major short-seller stops the rally. The initial rally is being driven by aggressive short-covering and speculative buying. If the hedge funds decide to chase the market higher by buying strength then look for a further acceleration to the upside.

One factor that could stop the rally is the start of a trade war between the United States and China in response to President Trump’s signing of a memorandum to impose sanctions on China for the theft of intellectual property.

To recap the big event on March 22, President Trump signed a presidential memorandum that could impose tariffs on up to $60 billion of imports from China, while the world’s second-largest economy countered with its own plan on March 23 to impose tariffs on up to $3 billion of U.S. imports.

Another factor that may slow down the rally was a rise in the weekly oil rig count. As reported by Baker Hughes, the weekly oil rig count rose by 4 to 804 in total, up 152 rigs from a year ago.

Only a week ago, crude oil seemed poised to move lower. At that time, hedge fund liquidation and rising U.S. production were driving the price action. Last week was a different story. The facts about rising U.S. output remain the same, but it appears that sentiment is driving the price action at this time. Therefore, we have to conclude that prices will remain elevated until the speculators stop buying.

We’re nearing a critical point in the crude oil market. We have geopolitical tensions and relatively tight global balances. These factors may be helping to exaggerate the rally. If the speculative buying stops then prices are likely to retreat. However, the size of any correction will be determined by seasonal factors.

According to Morgan Stanley, “We are only three-four weeks away from peak refinery maintenance, after which crude and product demand should accelerate…Global inventories are already at the bottom end of the five-year range.