Oil Price Fundamental Weekly Forecast – WTI, Brent Nearing Balance Zones; Need China Deal to Exceed Targets

The OPEC cuts are not about turning crude oil into a raging bull market, but rather to drive prices into a balance area. Currently, both WTI and especially Brent crude oil are within striking distances of that area.
James Hyerczyk
Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished the week sharply higher with tightening supply providing the most support for prices. For a second week, Brent crude oil outperformed U.S. crude oil because most of the bullish price action has been centered on deeper-than-expected OPEC-led production cuts and the impact of U.S.-led sanctions on Venezuelan oil exports. Despite these moves, on a macro level, the global oil market remains well-supplied, mostly due to increasing U.S. supply.  Additionally, gains are being limited by concerns over weakening global demand.

For the week, April WTI crude oil settled at $55.98, up $2.89 or +5.44% and April Brent crude oil closed at $66.25, up $4.15 or +6.26%.

Supply Issues Providing Most Support for Brent Crude Oil…

Prices were primarily supported last week by the news that Saudi Arabia, the defacto leader of OPEC, said it cut daily production and exports by a further 500,000 barrels per day (bpd) on top of its agreed OPEC quota reduction. Since January 1, an OPEC-led group has been cutting at least 1.2 million barrels per day from production in an effort to trim the global supply and stabilize prices. Last Tuesday, the Saudis said it had cut its output by almost 800,000 bpd in January to 30.81 million bpd.

The markets received a boost late in the week after Saudi Arabia said it would cut even more in March than it originally pledged. Russia said that it has cut its oil production by 80,000-90,000 barrels per day from its level in October, Moscow’s reference level for its cuts, the country’s energy minister said.

In the meantime, the political rift between Venezuela and the United States continued with the U.S. sanctions against the South American nation giving prices a slight boost.

While U.S. Production Caps WTI Gains

While the supply cut news has been especially bullish for Brent crude oil futures, the news from the U.S. government’s weekly inventories report wasn’t particularly bullish for WTI crude prices.

According to the U.S. Energy Information Administration’s weekly inventories report for the week-ending February 8, U.S. crude oil stockpiles rose last week to the highest since November 2017 as refiners cut runs to the lowest since October 2017.

Crude oil inventories built for a fourth week in a row, rising 3.6 million barrels to 450.8 million barrels in the week to February 8. Traders were looking for an increase of 2.7 million barrels.

Most analysts expect U.S. to rise past 12 million bpd soon, and perhaps even hit 13 million bpd by the end of the year.

IEA Thinks Supply Will Outstrip Demand

According to the International Energy Agency, the global oil market will struggle this year to absorb fast-growing crude supply from outside the Organization of the Petroleum Exporting Countries (OPEC), even with the group’s production cuts and U.S. sanctions on Venezuela and Iran.

Furthermore, the IEA said it expected global oil demand this year to grow by 1.4 million bpd, while non-OPEC supply will grow by 1.8 million bpd. This doesn’t bode well for the long-term crude oil bulls.

Big Jump in Brent Prices Over West Texas Intermediate

Brent crude oil continued to outperform WTI, hitting its highest level since November 21 while the U.S. contract remained below its early February high.

The spread between Brent crude oil and WTI crude oil has risen from a low of $6.80 on January 31 to a high of nearly $10.00. This is the result of a combination of the OPEC-led production cuts and the sanctions against Venezuelan exports, which are supportive for Brent crude oil, and the rising U.S. production, which is helping to limit gains for WTI crude oil.

Weekly Forecast

The OPEC cuts are not about turning crude oil into a raging bull market, but rather to drive prices into a balance area. Currently, both WTI and especially Brent crude oil are within striking distances of that area.

For April WTI futures, the target zone is $59.51 to $63.40. For Brent, the upside target zone is $67.77 to $71.59. Given the current fundamentals, prices are likely to consolidate once these zones are reached.

The wildcard is a U.S.-China trade deal. If this occurs in a timely manner, crude oil prices could easily exceed their current targets.

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