Oil Price Fundamental Weekly Forecast – With Market Balanced, Dollar Takes on Greater Importance

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures posted a volatile two-sided trade last week before closing lower. However, the markets still remained within striking distance of their three-year highs reached the previous week.

After trading lower early in the week, the markets turned to the upside on bullish news, but the rally was thwarted by a stronger U.S. Dollar following the release of robust jobs data on Friday.

Last week, March WTI futures settled at $65.45, down $0.69 or -1.04% and April Brent crude oil closed at $68.58, down $1.57 or -2.24%.

Additional factors affecting the price action were the U.S. Energy Information Administration’s (EIA) weekly inventories report and a survey on OPEC’s commitment to its program to cut production.

At the start of the week, crude oil futures were pressured by a firmer U.S. Dollar which rose because of rising U.S. Treasury yields. Prices reached their low for the week on Wednesday despite the EIA report that showed U.S. crude inventories rose by 6.8 million barrels during the week-ending January 26, after 10 straight weeks of declines. Analysts had expected a decrease of 126,000 barrels.

The major news revealed in the EIA report was that U.S. crude oil production in November surpassed 10 million barrels per day for the first time since 1970, and neared the all-time output record. However, this news wasn’t enough to deter buyers because a Reuters survey showed that adherence to the program to limit production rose to 138 percent from 137 percent in December, suggesting commitment is not wavering even as oil prices hit their highest level since 2014.

Traders also said that a drop in Venezuelan oil output also underpinned prices since its grade of oil is in high demand by U.S. refiners.

Forecast

This this week is likely to be determined by the strength or weakness in the U.S. Dollar. Last week’s fundamental news and price action suggests supply and demand may be balanced. Therefore the wildcard is the Greenback.

Last week’s news also tells us that the market is likely to push higher over the long-run until prices reach a level that encourages members of the OPEC-led group to begin cheating. So keep an eye on Russia since it’ll probably be the first country to raise issues.

Also supporting higher prices over the long-run will be the drop in Venezuelan oil output.

The surprise for traders will be the price action in the U.S. Dollar. Soaring U.S. Treasury yields should’ve led to a sharp rise in the Greenback, but buyers were scarce. The dollar was able to stabilize above a multi-year low, however, this move was not enough to crush crude oil prices.

I think a steep rise in the dollar will be needed to encourage hedge fund investors to begin liquidating their long crude oil positions. But, once they start, there could be a sharp break. For WTI traders, the major support is $64.11. For Brent traders, the trigger point for the start of a sell-off is $67.79.