Fundamental Forecast for <USOIL>: Bullish
Talking Points:
- The ONE Thing: The price of crude oil continues to be elevated by global tensions that could disrupt supply risk and falling inventories. Brent traded as low as $72.52 on Monday before steadily trading higher throughout the week to a high on Friday of $74.85. WTI traded in a similar pattern with extremes seen on Tuesday and Thursday.
- The bullish fundamental argument is tough to ignore as geopolitical tensions increase in the mid-east while supply chain bottlenecks in the US develop with rising global demand for cheap US oil.
- Per BHI, U.S. total count drops to 1,048; US Crude Oil Drilling Rig Count up 3 to 861
- The technical picture warrants focus for strong bullish support at $66.65 (spot at $69.29)
- Crude lifted for the week ahead of FOMC, British Petroleum earnings & OPEC Output Survey
Institutions appear to be pushing, but crude is barely budging. What that is the case remains a key question and concern for the bulls. Earlier this year, large speculators were holding their most aggressive long position in crude futures, but the price remains tepid.
A look at the CFTC data overlaid with price can help you see that institutions are not able to push up price like they once did as seen in the Paul Robinson Article on CFTC positioning.
Large Speculators Lose Their Power To Push Crude Prices
Data source: CFTC
The chart above shows data as of July 17. Recent data as of July 27 shows per weekly ICE Futures Europe data that hedge funds continue to boost their bullish Brent oil bets while distillate bets were lifted by the most since March.
In addition to the lesser effect of institutional positioning is the reduction in physical market tightness known as backwardation. Backwardation happens when a front-month contract (e.g., December 2018 crude) trades at a premium to a later dated contract (e.g., December 2019 crude.) Because the product is homogenous, a premium would be seen in the front month if there is demand pressure exceeding the costs of storage.
Crude Tightness Lessens As Price Tests Support
Source: Bloomberg
Once again, WTI and Brent crude has become the market everyone is discussing! Unlock our forecast here
Fundamental Strife Rises and Keeps Oil Supported
When in doubt about the potential upside for oil, there always (unfortunately) seems to be a geopolitical conflict to keep oil traders preferring to protect against upside shocks as opposed to downside shocks. The geopolitical story du jour comes from Tehran supported Yemeni Houthi rebels that are set to disrupt Saudi exports.
The US will continue to pump, and export as the recent EIA data showed a significant jump in exports of over 2.5 millionbarrels per day, which helps to make up for OPEC et al. declines. This week’s increase in US exports was the most on record per the EIA. The spread between WTI & Brent is helping to encourage buyers of US crude.
Next Week’s Data Points That May Affect Energy Markets:
The fundamental focal points for the energy market next week:
- Tuesday: EIA’s Monthly Crude Oil and Natural Gas Production
- Tuesday 4:30 PM ET: API Weekly Oil Inventories Report
- Tuesday: BP PLC Earnings
- Wednesday 10:30 AM ET: EIA issues weekly US Oil Inventory Report
- Wednesday:Bloomberg OPEC production survey for July
- Wednesday 02:00 PM ET: Federal Reserve Rate Decision, Hike probability < 2%
- Friday 1:00 PM ET: Baker-Hughes Rig Count
- Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts
---Written by Tyler Yell, CMT
Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as trading educational resources. Read more of Tyler’s Technical reports via his bio page.
Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.
Talk markets on twitter @ForexYell
