Oil Price Fundamental Weekly Forecast – Supported by OPEC Cuts, but Limited by Demand Concerns; China Deal is Wildcard

U.S. West Texas Intermediate and international-benchmark Brent crude oil struggled most of the week until a late session rally on Thursday ignited a strong follow-through move into the end of the week.

Prices were pressured early in the week as concerns over future demand were raised after the U.S. Treasury curve inverted. The drop in 10-year Treasury note yields below the 3-month Treasury bill yield is a highly accurate predictor of future recessions. Crude oil traders were rattled by the news, encouraging many to take profits. Prices further retreated after the weekly U.S. Energy Information Administration inventories report showed a bigger-than-expected build.

For the week, May WTI crude oil settled at $60.14, up $1.10 or +1.86% and June Brent crude oil closed at $67.58, up $0.83 or +1.23%.

President Trump issued another weak warning to OPEC to stop cutting production. This caused a blip to the downside, but prices stabilized as traders realized OPEC and its allies were not going to accommodate the President. Prices were further supported on Friday on reports that the OPEC-led group would likely extend their highly successful production cuts into the end of the year.

A rise in Treasury yields late in the week dampened concerns over a recession and lower demand for crude. Additionally, appetite for risk also increased on the hopes of a U.S.-China trade deal. These factors helped spike crude oil prices higher.

In Other News

Traders are watching activity in Malaysia and Singapore after the United States became aware of illicit Iranian oil shipments and the tactics Iran uses to evade sanctions, a top U.S. sanctions official said on Friday. The word is the U.S. had placed additional “intense pressure” on Iran last week.

“It seems that the Trump administration may be more serious about imposing sanctions on Iranian oil this time around,” said John Kilduff, a partner at Again Capital in New York. This could be a bullish development.

Additionally, the U.S. has instructed oil trading houses and refiners around the world to further cut dealings with Venezuela or face sanctions themselves. This is another potentially bullish development.

There is also chatter that OPEC’s de facto leader Saudi Arabia is struggling to convince Russia to stay much longer in the pact, and Moscow may agree only to a three-month extension, three sources familiar with the matter said. This is potentially bearish, but a little early for a reaction.

The government reported that slower output growth in the U.S. caused U.S. crude production to edge lower in January to 11.87 million bpd.

Finally, U.S. energy firms this week reduced the number of oil rigs operating to their lowest in nearly a year, cutting the most rigs in a quarter in three years, according to energy services firm Baker Hughes.

Weekly Forecast

This week, we expect the OPEC-led production cuts and the U.S. sanctions against Iran and Venezuela to provide support. Gains could be capped however by concerns over a slowing global economy that could weigh on crude demand.

The wild card remains the U.S.-China trade negotiations with some traders believing a deal is imminent. Any news of an agreement would likely spike prices higher.

May WTI crude oil is expected to be supported by a 50% level at $59.63. Overtaking the 200-Day Moving Average at $60.77 will indicate the buying is getting stronger. The primary upside target is $63.45. A break back under $59.63 will be a sign of weakness.

June Brent crude oil traders will be watching trader reaction to $67.90 to $68.45. Overtaking this area will be a sign of strength. If buyers can overtake $68.45 then $71.77 will become the primary upside target. A failure at $67.90 will be a sign of weakness with $66.23 to $65.70 the next downside target.

This article was originally posted on FX Empire



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