Oil Price Fundamental Weekly Forecast – Jump in Oil Rigs Could Weigh on Prices

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures posted a strong gain last week, taking the markets to multi-year highs. The tone of the market was set early in the week as investors reacted to a decline in U.S. drilling activity the week-ending January 5 and optimism over the OPEC-led production cuts.

March WTI crude oil futures settled at $64.23, up $2.82 or +4.59% and April Brent crude oil finished the week at $69.38, up $2.28 or +3.40%.

The markets were strong throughout the week with WTI futures exceeding highs last seen on November 28, 2014, the day after OPEC’s decision to cut production in an effort to trim the excess global supply and stabilize prices. The catalyst behind this move was another weekly decline in crude oil supply.

According to the U.S. Energy Information Administration, U.S. crude inventories fell 4.9 million barrels last week, more than the 3.9-million decline forecast.

Late in the week, prices received a boost after the United Arab Emirates’ (UAE) oil minister hinted that an alliance between OPEC and non-OPEC producers, including Russia, could continue in some way beyond their current deal to curb oil output.

UAE Energy and Industry Minister Suhail al-Mazrouei told CNBC on Thursday that the OPEC-led plan to cut production is working so it may be extended beyond the December 2018 deadline.

In other news, U.S. energy companies added 10 oil rigs this week, the biggest increase since June. The total rig count rose 752 in the week to January 12, the most since September, General Electric’s Baker Hughes energy services firm said in its closely followed report on Friday.

Forecast

The news about the increase in the oil rigs count should be a concern for the bulls this week. The U.S. rig count is an early indicator of future output. It’s much higher than a year ago when only 552 rigs were active after energy companies boosted spending plans in 2017 as crude started recovering from a two-year price crash.

The Baker Hughes data shows that the increase in U.S. drilling lasted 14 months before stalling in the second half of last year as some producers trimmed their 2017 spending plans after prices turned softer over the summer.

We expect the drilling numbers to continue to rise throughout the first quarter of 2018 or even longer if prices remain high.

I think we’re getting pretty close to a top since, in my opinion, the market has been driven higher this year mostly by aggressive hedge fund buying. The news lately hasn’t been bullish enough to warrant the current high prices. The rally will essentially stop when the hedge funds stop buying. And if “The Herd Theory” begins to kick in, we could see a wave of selling pressure as they all start heading for the exit door at the same time.

Traders should also keep an eye on U.S. production numbers. It is expected to rise to an all-time high of 10.3 million barrels per day in 2018 and 10.9 million bpd in 2019, up from 9.3 million bpd in 2017, according to a federal energy projection this week. Given the jump in oil drilling activity, we may even start to see forecasts of even higher production numbers. This may be the news that puts in the short-term top.