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James Hyerczyk
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Crude Oil
Crude Oil

U.S. West Texas Intermediate and internationally-favored Brent crude oil traders picked up where they left off last year, driving prices to their highest levels since mid-2015. Prices continued to be supported by the hedge and commodity fund money managers, betting that the OPEC-led plan to cut output, trim the global supply and stabilize prices would overcome increased U.S. production.

Last week, February WTI crude oil settled at $61.44, up $1.02 or +1.69% and March Brent crude oil finished at $67.62, up $0.75 or +1.12%.

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Weekly February WTI Crude Oil

Fundamentally, according to weekly government statistics, U.S. stocks fell more than expected, continuing a steady drawdown of supplies in the world’s largest oil consumer, though stocks of distillates and gasoline rose on heavy refining activity driven in part by year-end adjustments.

The U.S. Energy Information Administration reported that U.S. crude stocks fell by 7.4 million barrels in the last week of 2017, exceeding expectations, as refiners boosted activity to their highest rate since 2005.

At the start of the week, oil prices surged to their strongest start to a calendar year since 2014 amid anti-government protests in Iran. According to reports from news agencies and social media, Iranian protesters attacked police stations as security forces struggled to contain the boldest challenge to the clerical leadership since unrest in 2009.

In other news, Goldman Sachs and Morgan Stanley both raised their respective oil price forecasts in the latter months of 2017, citing a stronger-than-anticipated OPEC-led commitment to extend production cuts. The cuts, which started in January 2017, are poised to continue through all of 2018 as the allied oil producers seek to clear a global supply overhang.

Additionally, U.S. commercial crude inventories have slipped nearly 20 percent from the highs recorded in March last year.

Weekly March Brent Crude Oil

Forecast

The price action at the end of the week suggests that this current leg of the rally in WTI and Brent crude oil may be running out of steam.

Some traders feel that increased U.S. production is a big enough worry to offset the optimism fueled by the OPEC-led output cuts. U.S. production will likely break through 10 million barrels a day.

Additionally, some traders are questioning whether buyers got ahead of themselves last week in reaction to the unrest in Iran. According to reports, OPEC member Iran’s supply is not being threatened by the protests. Furthermore, the North Sea Forties and the Libyan pipelines are back to carrying oil. Their disruptions carried prices higher in recent weeks.

WTI crude oil is up 12 weeks from its recent bottom at $49.92. We don’t feel that the uptrend is going to be threatened, but we do question whether the funds will continue to be aggressive at current price levels, given the short-term fundamentals.

The OPEC-led production cuts may not be enough to drive prices higher at the current pace of the rally. I think the pipeline outages brought out the speculators and if they decide to start booking profits, prices could pull back to more reasonable levels. The nearest support for WTI futures is $58.00. A major 50% level at $64.02 is a potential upside target.

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