Oil Price Fundamental Weekly Forecast – Hedge Fund Liquidation Could Send Prices into Value Area

U.S. West Texas Intermediate and international-benchmark Brent crude oil closed lower for a second consecutive week. Traders continued to demonstrate that the decision by OPEC and other major producers in late November to extend production cuts to the end of 2018 was fully-priced into the market and the real market driver at this time is U.S. production.

January WTI crude oil settled at $57.36, down $1.00 or -1.71% and February Brent futures finished the week at $63.40, down $0.33 or -0.52%.

WTI crude oil was pressured all week and especially on Wednesday after the U.S. Energy Information Administration (EIA) said crude oil stockpiles fell more than expected last week as refineries increased output, but gasoline and distillate inventories posted unexpectedly large builds. Traders drove prices higher initially on the crude oil news, but the rally was stopped and prices turned lower in reaction to the gasoline and distillate reports.

According to the EIA, crude inventories fell 5.6 million barrels in the week to December 1, compared with analysts’ expectations for a decrease of 3.4 million barrels. At 448.1 million barrels, crude stocks, not including the strategic petroleum reserve, were at their lowest since October 2015.

Gasoline stocks rose 6.8 million barrels. Analysts’ were looking for a 1.7 million-barrel gain. Distillate stockpiles, which include diesel and heating oil, rose 1.7 million barrels, versus expectations for a 1 million-barrel increase, the EIA data showed.

The rise in gasoline inventories stunned traders enough to change the trend to down on the daily chart. This news suggests that refiners may not need to process as much crude in the future. Another rise in production also helped pressure prices.

The EIA report showed that U.S. production increased again. U.S. crude production climbed by 25,000 barrels per day (bpd) to 9.71 million bpd, the highest since monthly figures showing the United States produced more than 10 million bpd in the early 1970s.

Forecast

The change in trend to down on the daily chart could be an indication that investors are looking for value, now that the bullish OPEC news is out there. This event may encourage the hedge funds to pare positions and play for cheaper prices. They may use the weekly chart to determine the next major value zone.

Additionally, investors are worried that soaring U.S. output will threaten to undermine efforts led by OPEC and Russia to bring production and demand into balance following years of oversupply.

Late last week, buyers may have showed a delayed reaction to Wednesday’s U.S. Energy Information Administration’s weekly inventories report which showed a bigger than expected drop in crude oil stocks. Traders may have also overreacted to a massive rise in gasoline and distillate stocks, drawing the attention of bargain-hunters. Traders are also saying that a surprise jump in Chinese crude demand and a threat of a strike in Africa’s largest oil exporter may also be underpinning the market late in the week.

In other news, this week’s U.S. rig count, an early indicator of future output, ticked up by two oil rigs to a total of 751, according to oilfield services firm Baker Hughes.

At this time, the crude oil market is susceptible to heavy fund liquidation so I’m looking for prices to continue to weaken.  The catalysts behind the selling pressure will be increased U.S. production and another rise in gasoline and distillate stocks.

The news of increased Chinese demand on Friday may have been a one-time event. If it was then sellers will return early this week. The treat of a strike in Africa’s largest exporter is also something to watch because any disruptions in supply will fuel another round of short-covering. This event may be the wildcard this week that ultimately decides if prices will rise or fall.