Oil Price Fundamental Weekly Forecast – Rangebound Until Demand Concerns are Lifted

Our work suggests that $58.63 is the line in the sand for WTI traders, and $67.74 for Brent traders. This is the level where concerns over global demand and high U.S. oil production meet optimism over OPEC-led production cuts and unplanned problems in Iran and Venezuela.
James Hyerczyk
Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished higher last week after hitting new highs for the year earlier in the week. However, Friday’s weak session suggests buyers may face some headwinds this week due to increasing worries about the global economy and soaring U.S. production.

Looking at the weekly charts, it appears buyers and sellers are torn between global economic concerns and robust U.S. oil production and the strict adherence to the OPEC-led plan to cut production, trim excessive global inventories and stabilize prices.

Last week, May WTI crude oil futures settled at $58.82, up $2.39 or +4.24% and May Brent crude oil finished at $67.16, up $1.42 or +2.11%.

Underpinned by Supply Cuts and Unexpected Disruptions

The OPEC-led production cuts which began on January 1 and the U.S. sanctions against Iran and Venezuela have been carrying crude oil prices higher for months

IEA Sees Deficit Coming

On Friday, the International Energy Agency (IEA) said that the market could show a modest surplus in the first quarter of 2019 before flipping into a deficit in the second quarter by about 0.5 million barrels per day (bpd).

IEA Sees Demand Needs Being Met

The IEA threw a little water on the rally on Friday when it said that OPEC has created a comfortable supply cushion that could prevent a spike in prices due to unexpected supply disruptions. Furthermore, the IEA also said that non-OPEC oil output growth led by the United States should ensure demand is met. This news drove prices lower on Friday.

Worries Over Fuel Demand

Concerns that an economic slowdown in Asia and Europe could dent growth in fuel demand and cap price gains are also weighing on prices. Translation:  Buyers seem to be nervous about chasing prices higher. Although prices have firmed since late December, most of the buying has been short-covering. Prices have hit the 50% level of the major break from October. This is discouraging long traders from adding to positions, and encouraging hedgers to lock in prices.

Mixed Supply/Demand News Last Week

Goldman Sachs implied last week that concerns over global demand may be exaggerated. GS analysts said, “Growth in global demand for crude in January was ‘nearly 2.0 million barrels per day, with strength visible in both emerging markets and developed economies’.”

Furthermore, recent data showed crude oil use in China, the world’s biggest importer, in the first two months of 2019 rose 6.1 percent from a year earlier to a record 12.68 million bpd.

Additionally, worries about rising U.S. inventories and production were lifted last Wednesday, at least temporarily, with the release of a bullish EIA inventories report.

The EIA report for the week-ending March 8 showed U.S. commercial crude oil inventories fell as refineries hiked output.

Crude inventories dropped by 3.9 million barrels in the last week, to 449.07 million barrels, compared with analyst expectations for an increase of 2.7 million barrels. U.S. crude oil production also dipped, falling by 100,000 barrels per day (bpd) to 12 million bpd.

Weekly Forecast

Last week’s price action suggests May WTI crude oil is nearing resistance and may be ripe for a short-term correction. The major upside target is a weekly 50% level at $58.63. May Brent ran into key resistance at $67.74 for the second time in a month.

In other news, OPEC and its allies will meet on April 17-18 to decide production policy. Our work suggests that an extension of the production cuts are likely to continue. Furthermore, a continued draw of supply combined with increasing demand due to the expected end of the U.S.-China trade dispute will likely be supportive for higher prices later in the year.

Short-term, however, the markets are likely to remain rangebound until the key resistance levels are overcome by a flood of strong buying.

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