Oil Price Fundamental Weekly Forecast – Weak Close in Brent Could Drag Down Prices

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed lower last week. In a volatile trade, the price action was influenced by a major pipeline shutdown, a two-sided U.S. Energy Information Administration (EIA) inventories report and a bearish outlook for supply by OPEC and the International Energy Agency (IEA).

Last week, February West Texas Intermediate crude oil settled at $57.33, down $0.11 or +0.19% and March Brent crude oil futures closed at $62.65, down $0.38 or -0.60%.

The week started with Brent crude oil futures spiking to its highest level in 2 ½ years on Monday on news that a major pipeline in the U.K.’s North Sea will shut down for repairs.

According to reports, the Forties pipeline system will close for several weeks while its operator, INEOS, repairs a crack in a pipe discovered last week. The pipeline is responsible for about 450,000 barrels a day of Forties crude from offshore fields in the North Sea to a processing plant in Scotland.

On Wednesday, U.S. West Texas Intermediate and international-benchmark Brent crude oil declined for a second day as a drawdown in U.S. crude stockpiles was offset by a larger-than-forecast rise in gasoline stocks and as U.S. crude oil production continued to climb to record highs.

U.S. production also hit another record high at 9.78 million barrels per day (bpd), EIA data showed. The U.S. peak, when records were only kept on a monthly basis, is 10.04 million bpd, set in November 1970.

Later in the week, the IEA raised its U.S. crude output growth forecast for 2018, saying it would climb by 870,000 barrels per day (bpd) compared with its November forecast of 790,000 bpd.

The IEA also said it expects the oil market to have a surplus of 200,000 bpd in the first half of next year before reverting to a deficit of about 200,000 bpd in the second half. This would mean 2018 overall would show “a closely balanced market.”

OPEC also revised its estimate for U.S. oil output growth for 2018 to 1.05 million bpd, while the U.S. Energy Information Administration increased its growth forecast to 780,000 bpd.

In other news, the oil rig count fell by four to 747 in the week to December 15, General Electric’s Baker Hughes energy services firm said in its closely followed report on Friday. This was the first drop in the rig count in six weeks.

Forecast

The key to the direction of the crude oil market this week is likely to be determined by the price action in the Brent crude oil market. The rig count data is also short-term positive.

The IEA and OPEC data is potentially bearish for the WTI futures contract. Additionally, the increased production noted by the EIA in its weekly report is also a negative.

Propping up the markets may be the reported pipeline shutdown since this will have a direct effect on short-term supply. However, the Brent futures contract closed lower after hitting a 2 ½ high. This may actually be a sign that the selling is greater than the buying at current price levels.

At this time, I see a potential battle taking place between those that believe in the short-run (the pipeline incident) and the long-run (increased U.S. production).

The key will be trader reaction to last week’s low in the Brent contract. Taking out $61.47 will confirm the chart pattern. If this attracts enough sellers, we could see an eventual break to $57.60.

WTI could collapse to $54.46 if $55.94 fails as support.