Oil Price Fundamental Weekly Forecast – Moving Closer Toward Better Balanced Supply Situation

U.S. West Texas Intermediate and international-benchmark Brent crude oil finished higher last week. The markets were boosted by expectations for increased fuel demand and signs of tightening U.S. supply. Numerous catalysts fueled the price action from an upbeat tone following the high levels U.S-China trade talks to a cut in the number of operating oil rigs.

Last week, March WTI crude oil settled at $55.26, up $1.57 or +2.92% and April Brent crude oil finished at $62.75, up $1.16 or +1.85%.

U.S. Sanctions Venezuelan Crude Oil

The week started with Washington announcing export sanctions against Venezuela’s state-owned oil firm PDVSA, limiting transactions between U.S. companies that do business with Venezuela through purchases of crude oil and sales of refined products.

The sanctions aim to freeze sale proceeds from PDVSA’s exports of roughly 500,000 barrels per day (bpd) of crude oil to the United States.

According to reports, so far the sanctions have been mostly disruptive for refiners on the U.S. Gulf Coast, who are being forced to seek alternative heavy crude supplies, and have stepped up purchases of crude oil and sales of refined products. However, investors are concerned about pipeline capacity bottlenecks in Canada.

On Thursday, market sources told Reuters that some U.S. refiners have begun reducing crude processing as the sanctions have boosted oil costs and as gasoline margins crashed to their lowest in nearly a decade.

EIA Inventories Surprise:  Gasoline Stocks Fell

According to the EIA, crude inventories rose 919,000 barrels during the week-ending January 25. The number came in below guesses calling for an increase of 3.2 million barrels.

The bullish news, however, was the huge drop in gasoline inventories. After eight consecutive weeks of builds to a record high, gasoline stocks fell 2.24 million barrels the week-ending January 25, versus forecasts for a 2.8 million-barrel gain. Distillate stockpiles decreased by 1.12 million barrels, compared to estimates for a decline of 2.0 million.

OPEC-led Production Cuts Working

WTI prices rose to a two month high on Thursday after a Reuters poll showed the market is being supported by the OPEC-led supply cuts which began on January 1. The data showed OPEC pumped 30.98 million barrels per day (bpd) in January, down 890,000 bpd from December.

Optimism Over Trade Talks

Helping to support prices late in the week is the upbeat tone in the markets following the two-day high level trade talks between the United States and China. On Thursday, President Trump said he would meet with Chinese President Xi Jinping soon to try to seal a comprehensive trade deal as the top U.S. negotiator reported “substantial progress” in the two days of high-level talks, CNBC said.

Strong Job Growth Equals Higher Fuel Demand

Prices were also supported on Friday by a stronger-than-expected headline payrolls number that indicates strength in the labor market and solid ISM Manufacturing PMI data, which indicates strong factory demand.

Drillers Cut Rigs

Energy services firm Baker Hughes said on Friday that drillers cut 15 oil rigs in the week to February 1, bringing the total count down to 847, the lowest since May 2018.

Weekly Forecast

Prices are likely to continue to be underpinned this week by the same slew of positive events from last week. The price action suggests that investors are comfortable with the slow and steady grind being fueled by a combination of speculation and short-covering. Prices are likely to spike higher if a U.S.-China trade deal is reached.

The fact that the market closed higher last week despite negative factory activity news from China is another sign that sentiment has shifted to the upside. The price action also suggests that traders are increasing bets on the market moving toward a better balanced supply situation.