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Oil Price Fundamental Weekly Forecast – Needs Major Shake-up in U.S. Supply to Force Short Hedge Funds to Cover

With the hedge funds decisively short, it’s going to take some major news to trigger a breakout to the upside. However, after two weeks of consolidation, we could say there is a buyer in the market, defending prices against a major sell-off. That being said, we could go through another week of consolidation.

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures settled lower last week with most of the selling pressure emerging on Friday. For the most part, it was a pretty uneventful week with prices consolidating as investors continued to digest the previous week’s decision by an OPEC-led group of producers to trim output starting in January. Sellers resurfaced on Friday following the release of softer-than-expected economic data from China.

Last week, February WTI crude oil settled at $51.47, down $1.34 or -2.54% and February Brent crude oil closed at $60.28, down $1.39 or -2.31%.

U.S. Energy Information Administration

According to the U.S. Energy Information Administration (EIA), crude oil inventories in the United States dropped 1.2 million barrels during the week-ending December 7. This was smaller than the expected draw of 3.0 million barrels and well-below the American Petroleum Institute’s reported withdrawal of 10.18 million barrels.

The EIA also said gasoline inventories rose by 2.1 million barrels during the first week of December, with daily production at 10.5 million barrels, versus 9.7 million bpd a week earlier. Distillate stocks fell 1.5 million barrels. The daily production rate was 5.5 million barrels versus 5.6 million bpd the week before. For the week, refineries processed 17.4 million bpd of crude, down from a week earlier.

Supporting Prices

The rangebound WTI and Brent crude oil markets were underpinned last week by the announced production cuts from a week earlier and a report from the International Energy Agency, which showed it expected a deficit in oil supply by the second quarter of next year, provided OPEC members and other major exporters follow their plan to reduce production.

There was also a report from Bloomberg that said Saudi Arabia plans to slash exports to the world’s largest oil market in the coming weeks in an effort to dampen visible build-ups in crude inventories.

Pressuring Prices

Gains were capped last week and prices retreated following reports of weaker than expected economic activity in China. These reports raised concerns over future demand from the world’s second-largest economy.

Additionally, it was reported that oil refinery throughput in November in China fell from October, which was the second-highest month on record, suggesting an easing in Chinese oil demand.

Refineries processed 50.46 million tonnes of crude oil last month, or 12.28 million bpd, up 2.9 percent from the same month last year, the National Bureau of Statistics reported. That figure is down from October and from the record of 12.49 million bpd reported in September. Finally, for the first 11 months of the year, refinery output gained 7.2 percent to 554.48 million tonnes, or 12.12 million bpd, on track for an annual record.

Forecast

With the hedge funds decisively short, it’s going to take some major news to trigger a breakout to the upside. However, after two weeks of consolidation, we could say there is a buyer in the market, defending prices against a major sell-off. That being said, we could go through another week of consolidation.

Watching the price action last week and especially on Thursday, one could see that the news of Saudi Arabia cutting exports to the U.S. was bullish. Their plan is to shrink U.S. stockpiles. If successful over the near-term, crude oil prices could begin to strengthen. Our work suggests that the market may be just one bullish EIA inventories report away from breaking out to the upside.

Like I implied earlier, it’s going to have to be something major to encourage the hedge funds to begin covering short positions aggressively.

Prices do remain vulnerable to the downside as seen in Friday’s market. Traders are watching trade talk developments between the U.S. and China as well as China’s economy. So a disruption in the trade talks and additional reports showing a weakening Chinese economy could encourage hedge funds to add to already established short positions. This could mean new lows.

Essentially, any talk of further supply cuts by Saudi Arabia will be supportive for prices. On the flip-side, problems with U.S-China trade relations or additional signs of a weakening Chinese economy could be bearish.

This article was originally posted on FX Empire

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