Oil Price Fundamental Weekly Forecast – Production Cut Extension Speculation Providing Support

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished higher last week, posting a potentially bullish closing price reversal bottom in the process. The chart pattern may not mean that buyers have returned, but it certainly indicates that shorts are covering and selling pressure has diminished. There were no major changes in the fundamentals, but late in the week, talk of the U.S. postponing its tariffs against Mexico that were expected to start on June 10, helped underpin prices.

Last week, July WTI crude oil futures settled at $53.99, up $0.49 or +0.92% and August Brent crude oil finished at $63.29, up $1.30 or +2.05%.

The divergence between Brent crude oil and WTI was one of the highlights for the week. Brent was supported by tighter supply because of the OPEC-led production cuts and the U.S. sanctions against Iran and Venezuela. WTI was weighed on by concerns over rising U.S. production.

Both markets, however, were influenced by concerns that a weakening global economy will lead to lower energy demand.

Rising U.S. Supply Weighed on Prices

Crude oil prices plunged on Wednesday after the EIA reported a weekly build in crude oil inventories of 6.8 million barrels. Traders were looking for a 1.7 million barrel draw down. The EIA also said that total stockpiles are now at 483.3 million barrels, 5 percent above the seasonal average.

The EIA report also showed gasoline stockpiles rose 3.2 million barrels during the week-ending May 31. This compares with a decline of 600,000 barrels a week earlier. Gasoline production averaged 10 million bpd last week, compared with 10.1 million bpd a week before.

Distillate fuels also rose. The EIA reported an inventory build of 4.6 million barrels, compared with a small draw of 200,000 barrels a week earlier. Refineries produced 5.4 million bpd of distillates during the week-ending May 31, up from 5.1 million bpd a week earlier.

OPEC to the Rescue

Prices were being supported late in the week by friendly comments from Saudi Energy Minister Khalid al-Falih. He said at a conference in St. Petersburg, Russia that $60 a barrel was too low to encourage investment in the industry.

Falih said he did not want to boost Saudi production to make up for a lower oil price and that a return to the price-crash environment of 2014-15 was unacceptable. This statement suggests the cartel and its allies could tighten even further once it ratifies the extension of its original January 1 agreement to cut out, trim global supplies and stabilize prices, beyond the June 30 deadline.

Other News

Baker Hughes on Friday reported that the number of active U.S. rigs drilling for oil fell by 11 to 789 this week. That followed a climb of 3 rigs last week. The total active U.S. rig count, meanwhile, declined by 9 to 975.

Weekly Forecast

The combination of the potentially bullish weekly chart pattern and the news of a deal between the United States and Mexico are likely to underpin prices this week. Furthermore, as we move closer to the OPEC meeting at the end of the month, we’re going to find out more about the proposed extension of the OPEC-led plan to cut production, trim the global supply and stabilize prices.

The new deal should also provide support. Prices could move higher if the cartel and its allies talk about a further tightening to bring the market back into balance.

We’re likely to continue to see heightened volatility which is very common when speculators are present.

From a technical perspective, bullish July WTI crude oil futures traders are going to try to build a support base between $55.32 and $52.70. A sustained move over $55.32 will indicate the buying is getting stronger.

The major support base for August Brent crude oil futures is $62.93 to $60.32.

If the fundamentals cooperate then the reversal chart pattern could lead to a 2 to 3 week counter-trend rally.