Fundamental Forecast for US OIL: Bullish

Talking Points:

• Inventory drawdowns in the US keep hopes alive while the Oil price remains above $58/60
• IEA forecasts global supply deficit in H2 2018 despite US shale due to Venezuelans production drops
• Downside risk remains in lack of bearish positioning, but fundamentals support upside for now
• Per BHI, U.S. Oil Rig Count rises by 4 to 800, US Total Rig Count at 990
• IGCS shows growing net-long retail positioning in WTI - US Oil, favoring downside pressure

Despite trade well below the January 25 peak of $66.58/bbl, WTI appears poised for further gains. This week, traders were treated to two favorable fundamental developments that crude oil trading and closing above the $60/bbl mark.

Crude Oil Product Draw offsets Crude Inventory Build

The weekly EIA Crude Oil Inventory Report displayed a further reduction in refined product stockpiles that reached their lowest levels since Spring 2015. At the same time, refinery utilization is ramping up intake at a pace surpassing previous years that was enough to calm sellers who saw the first crude build in inventories at the Cushing, OK storage hub in 12 weeks.

The headline data saw a 6.27 million barrel decline in gasoline inventories and a larger than expected 5.02 million increase in crude inventories. In short, while upstream continues to produce, downstream continue to buy keeping the Bulls happy.

IEA Forecasts Crude Supply Deficit in H2 2018

The International Energy Agency (IEA) supported the global oil market by saying shale growth is helping to balance, as opposed to drown the market. The IEA’s focus in their monthly report was the falling supply of oil from Venezuela that has cut back on high levels of relative production due to their domestic economic crisis. As such, the global oil stockpile surplus is expected to dissipate by year-end putting the oil market in a decisive deficit helping to support crude oil price further.

Data Source: Bloomberg, Chart created by Tyler Yell, CMT

The chart has an overlay of the price of the 10 Year Venezuela Bond to the production output data. The chart shows a sharp decline in both the price of the Venezuela sovereign bond showing a significant probability of default and the capital-intensive process of extracting oil. Oil output in Venezuela, an OPEC country, is at the lowest levels since 1940 per Bloomberg data.

The IEA pointed to the decline of the blue line as a key cause for the supply deficit alongside a rise in implied demand by 90,000 barrels a day to 1.5 mbpd in 2018.

Futures Positioning Hangs High With Sellers Remaining Absent

At DailyFX, we’re always keen to see patterns and insights in institutional positioning. As you can see in the chart below, retail crude oil bulls need institutional crude oil bulls as the net positioning has shown shorts look to have thrown in the towel for now.

The price in orange naturally follows institutional positioning with a rolling 40-day correlation at 0.95 (scale -1.0 to +1.0) showing that if institutions are buying, selling can be difficult.

Data Source: Bloomberg, Chart created by Tyler Yell, CMT

Technical Focus for Crude Oil – Bullish Resumption

The technical focus on WTI Crude Oil remains a hold above trendline support off the August and February low that currently sits near $60/bbl. A break below the trendline would open up a likely test of the 200-DMA at ~$56/bbl.

The bullish focus is on a breakout on a close above $63.62/27, the January 30 low and March 6 high respectively. A move and close above $63.62/27 would align with a Bullish breakout per the Ichimoku cloud (not shown.) The longer-term bullish targets are the January high at $66.58 and the 100% Fibonacci extension of the entire move off the January 2016 low at $70.16 as long as price holds above the 200-DMA.

Crude Oil Price Holds Support As Stocks and US Bond Yields Rise Post-NFP

Chart Source: ProRealtime, IG UK Price Feed. 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, Russia votes for president with Vladimir Putin expected to be re-elected
• Monday, Day 1 of 3 – FT Commodities Global Summit in Lausanne
• Monday: JODI issues world oil exports, output data
• Tuesday: China’s National People’s Congress holds its closing session with a speech by President Xi Jinping
• Tuesday: Saudi Crown Prince MBS meets with US President Donald Trump
• Tuesday 04:30 PM ET: API issues weekly US Oil Inventory report
• Wednesday 10:30 AM ET: EIA issues weekly US Oil Inventory Report
• Wednesday 2:00 PM ET: Federal Reserve Interest Rate Decision (Rate hike 100% priced into the market)
• Thursday 05:00 AM ET: IEA monthly Oil Market 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 Insight from IG UK Client Sentiment:: Contrarian view of retail positioning favors bullishness

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.