Fundamental Forecast for USOIL: Bullish
Talking Points:
- Crude oil and Brent supported on further actions from OPEC to limit exports
- The oil supply glut continues to shrink as evidenced by the 7.2m bbl decline per the DoE
- Dovish Federal Reserve on Wednesday gave way to a weaker USD that helps commodities
- Per Baker Hughes, US Oil Rig count falls by 2 rig to 766 total active US oil rigs
- IGCS showing increase in retail short oil positions, contrarian view suggests prices rise further
You know how in some weeks, everything goes well? This week was a week like no other for Crude Bulls as trading started with news out of St. Petersburg that OPEC had reached a further agreement to cut exports from Saudi Arabia (the de-facto head of OPEC), the U.A.E. and Kuwait. Saudi also said they would look to ‘forcefully demand participation’ of compliance to the production curb deal that has been extended to March 2018. After briefly punching below Friday’s low on Monday morning, Crude Oil closed the trading day higher consecutively for the rest of the week until settling near $50/bbl. The total gain was nearly 9% on the week and the environment and sentiment picture (more below) seem to point to more gains to come. What a difference a week can make!
New OPEC actions and oil product demand is helping the energy market. Click here to see our Q3 forecast on what outcomes we're watching!
On Wednesday, news of falling US inventories that aligned with rising demand as evidenced by a 7.2m bbl inventory draw and a decline against other products such as distillate and gasoline touched an aggregate low not seen since early 2016 and helped to provide evidence that the supply glut is indeed shrinking. On an individual basis, Crude stockpiles fell to the lowest levels since January while the EIA shared that the demand for fuel had rising to the highest June level in a decade.
Two related currency markets worth watching in addition to crude oil is the US Dollar and the Canadian Dollar. The USD, which fell deeper this week to a new 14-month low after the Federal Reserve’s statement when they decided not to hike rates showed a likely preference for fewer rate hikes than previously expected is the pricing currency for Oil. Therefore, a weaker USD may provide a further boon to commodities, Oil included. The Canadian Dollar, which ended the week trading aggressively higher and the strongest relative G10 currency showed the seven straight month of GDP growth may also see marginal gains as Oil, a key export becomes more valuable and adds even more to GDP export value.
Combining the positive fundamental picture above with the chart below, and you may find further reason to anticipate further gains. The price of Crude Oil has recently broken above the top of a falling (bearish) price channel that has framed price action for most of 2017. Therefore, if the fundamental picture of rising demand and a weaker USD holds, we could see a move to the lower-$50s in WTI, and mid-$50s in Brent.
Crude Oil price breaks above strong resistance from confluence of levels at $47.29-$48.20
Chart Created by Tyler Yell, CMT
Next Week’s Data Points That May Affect Energy Markets:
The fundamental focal points for the energy market next week:
- Sunday: Venezuala votes on President Nicolas Maduro’s constitutional assemply plan
- Monday 12:00 PM ET: EIA releases Petroleum Supply Monthly
- Tuesday 4:30 PM ET: API weekly U.S. oil inventory report
- Wednesday 10:30 AM ET: EIA Petroleum Supply Report
- Fridays 1:00 PM ET: Baker-Hughes Rig Count at
- Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts
Crude Oil IG Client Sentiment Highlight: Contrarian view suggests rise in price holds
Oil - US Crude: Retail trader data shows 41.4% of traders are net-long with the ratio of traders short to long at 1.41 to 1. The number of traders net-long is 3.9% lower than yesterday and 32.6% lower from last week, while the number of traders net-short is 22.2% higher than yesterday and 78.7% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Oil - US Crude prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Oil - US Crude-bullish contrarian trading bias.(Emphasis mine)
The insight derived from this sentiment analysis on Oil is that traders are increasing their short exposure while reducing their long coverage despite recent gains. Taking this into account, the sentiment picture favors further gains.
-TY
