Oil Price Fundamental Weekly Forecast – Rally Based on Hope May Not Last, Watch for Short-Term Pullback

U.S. West Texas Intermediate and international-benchmark crude oil futures closed at their highest levels since the week-ending December 7 with a couple of factors driving short-sellers out of the market, while attracting some light speculative buyers. These included a positive outlook for U.S.-China trade relations after the two economic powerhouses ended three days of mid-level talks and continued adherence to the OPEC-led plan to cut production, trim excess supply and stabilize prices. Prices were capped late in the week on renewed concerns over a global economic slowdown.

Last week, March WTI crude oil settled at $51.91, up $3.63 or +7.52% and March Brent crude oil finished at $60.48, up $3.42 or +5.65%.

Hopes that an all-out trade war between Washington and Beijing might be averted fueled a week-long rally in crude. Although no concrete agreement was reached after three-days of mid-level discussions between U.S. and Chinese officials, the positive outcome resulted in the two economic powerhouses agreeing to higher-level talks later in the month.

Dampening the good news over trade talks were concerns over a slew of recent economic reports that raised worries about a global economic slowdown. Furthermore, according to policy sources talking to Reuters, China plans to set a lower economic growth target of 6-6.5 percent in 2019 compared with last year’s target of “around” 6.5 percent. Crude oil traders took profits on Friday because an economic slowdown would lead to lower demand for crude, leading to weaker prices.

Weekly Inventories Recap

According to the U.S. Energy Information Administration (EIA), domestic supplies fell by 1.7 million barrels for the week-ended January 4. Analysts were looking for a drop of 1.4 million barrels.

Gasoline stockpiles, however, rose by 8.1 million barrels the same week, while distillate stockpiles climbed by 10.6 million barrels, according to the EIA. Analysts were looking for smaller supply increases of 4.2 million barrels for gasoline and 4.3 million barrels in distillates.

Other News

According to General Electric Company’s Baker Hughes energy services firm, U.S. energy firms cut four oil rigs last week for a second week of declines. Traders said that producers have turned conservative in their 2019 drilling plans due to uncertainty over a recovery in crude oil prices. The biggest worry is future demand because of the U.S.-China trade dispute.

Forecast

The two week rally has been impressive but so far it’s been based on hope. Hope that the U.S. and China will reach a trade agreement, and hope that OPEC and its allies will stay the course and continue to cut production. However, rallies based on hope seldom last.

Furthermore, the first rally from the multi-year low was likely based on short-covering. This is normal, however, lasting rallies are based on real buying not short-covering.

Based on this assessment, we anticipate a short-term pullback into a support area. The best support area for WTI crude oil is $48.14 to $46.85 and for Brent, the target is $56.39 to $54.96. A pullback into these zones is likely to attract buyers.

Traders may continue to chase this market higher if more positive news comes out of China this week and if U.S. supplies of crude, gasoline and distillates show drawdowns.