Oil Price Fundamental Weekly Forecast – Hedge Funds are Key to Next Move

Crude oil futures finished the week mixed with U.S. West Texas Intermediate futures posting a loss and international-benchmark Brent finishing higher. U.S crude was pressured by the start of the Keystone pipeline and higher production. Both gained after OPEC voted to extend its production cut program with Brent retaining most of its gains for the week.

January WTI crude oil settled at $58.36, down $0.59 or -1.00% and February Brent finished at $63.73, up $0.26 or +0.41%.

Prices eased early in the week due to uncertainty over the OPEC deal and the news that TransCanada would restart the 590,000-bpd pipeline at reduced pressure after getting approval from U.S. regulators.

Mid-week, the Energy Information Administration (EIA) reported U.S. crude oil stocks fell last week, led by the biggest fall in inventories at the Cushing, Oklahoma storage hub in eight years, while gasoline and distillate stockpiles rose.

Crude inventories fell 3.4 million barrels in the week to November 24, compared with analysts’ expectations in a Reuters poll for a decrease of 2.3 million barrels. The EIA said that most of the drop was attributed to a fall in stocks at the Cushing, Oklahoma, futures delivery hub, which was down by 2.9 million barrels.

Stocks of gasoline and distillates rose more than anticipated. Distillate inventories, which include diesel and heating oil, rose 2.7 million barrels, versus expectations for a 230,000-barrel increase, the EIA data showed. Gasoline stocks rose 3.6 million barrels, compared with forecasts for a 1.2 million-barrel gain.

Late in the week, OPEC, Russia and nine other producers decided to extend production cuts through the end of 2018 at a meeting in Vienna, Austria. The deal will be reviewed in June for signs that the oil market is overheating.

In other news, U.S. energy companies added two oil rigs in the week to December 1, bringing the total count up to 749, the highest since September, General Electric Company’s Baker Hughes energy services firm said in its closely followed report on Friday.

Forecast

The extension of the OPEC-led production cuts was already priced into the market so, in my opinion, the next move will be up to the hedge funds since they hold huge long positions. We’re going to be watching to see if they continue to be willing to buy strength to extend the rally, or if they decide to book profits and play for a retracement into more favorable price levels.

I believe the key takeaways in the extension is that countries involved in the deal will be keeping an eye on price levels and on U.S. production and will be willing to take steps to prevent prices from rising too high, too fast.

Russia in particular is worried about U.S. production. It fears that if prices move too high, the U.S. will ramp up production so it wants to have the ability to exit the deal early should the market overheat and prices rise too far.

This week, we may get to see if the hedge funds are willing to test this particular aspect of the extension deal, or respect it and start taking profits.