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Oil Price Fundamental Weekly Forecast – Tone is Bullish, but Rig Count Jump Could Lead to Early Weakness

By:
James Hyerczyk
Published: May 13, 2018, 07:50 UTC

Last week’s news about new sanctions on Iran will be long-term bullish if it leads to a supply shortage as widely expected, however, it may take as many as 180-days before the effects of the cut in supply are actually felt. Nonetheless, speculators wasted no time in positioning themselves ahead of the future shortage.

Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil posted their highest closes since late 2014 last week. The rally was driven by looming U.S. sanctions against major oil producer and OPEC-member Iran which threaten to drive prices even higher over the near-term as traders prepare for an even tighter supply situation.

Last week, July WTI crude oil settled at $70.68, up $1.10 or +1.58% and July Brent crude oil finished at $77.12, up $2.25 or +3.01%.

July WTI Crude Oil
Weekly July WTI Crude Oil

Last week’s speculative buying was initiated by President Trump’s decision on Tuesday to walk away from the Iran nuclear deal.

In other news, the U.S. Energy Information Administration reported that U.S. crude inventories fell by 2.2 million barrels in the week-ending May 4 to 433.76 million barrels. Traders were looking for a draw of 0.2 million barrels. The five-year supply average is 420 million barrels.

Additionally, weekly U.S. crude oil production hit another record last week, climbing to 10.7 million barrels per day (bpd). That’s up 27 percent since mid-2016 and means U.S. output is creeping ever closer to that of top producer Russia, which pumps around 11 million bpd.

Finally, on Friday, Houston oilfield services company Baker Hughes reported that the number of rigs exploring for oil and natural gas in the U.S. increased by 13 this week to 1045. At this time a year ago there were 885 active rigs.

Brent Crude Oil
Weekly July Brent Crude Oil

Forecast

Last week’s news about new sanctions on Iran will be long-term bullish if it leads to a supply shortage as widely expected, however, it may take as many as 180-days before the effects of the cut in supply are actually felt. Nonetheless, speculators wasted no time in positioning themselves ahead of the future shortage.

On the bullish side of the coin, the U.S. plans to re-impose sanctions against Iran, which produces around 4 percent of global oil supplies. The sanctions will be taking place at a time when OPEC-led production cuts have already tightened the supply situation. Additionally, global inventories have tightened amid strong demand from Asia.

Speculators are betting heavily that the sanctions will lead to supply disruptions that will make crude oil an attractive enough asset to drive prices to $80 -$100 per barrel later this year.

On the bearish side some traders believe prices won’t move nearly as high because of rising U.S. production and the possibility that other suppliers from within OPEC will step up output in order to counter the Iran disruption. This would essentially end the OPEC-led deal to trim production.

There is some chatter in the markets suggesting Kuwait and Iraq as two producers with the best ability to raise output quickly in response to any fall in Iranian exports.

Additionally, there are also some traders who believe soaring U.S. crude oil production may also help fill Iran’s supply gap.

We may see some weakness at the start of the week due to the jump in the rig count. Long investors may be encouraged to book profits on this news in an effort to drive prices back into value areas. Speculative buyers are likely to step in on any move into a value zone or support area.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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