Fundamental Forecast for USOIL: Neutral

Talking Points:

• Crude Oil has fallen from 3-year highs, but fundamentals continue to support trend
• Per BHI, U.S. Oil Rig Count up 7 to 798 after last week’s aggressive gain of 26 rigs
• EIA Crude Oil Inventory Data sparks Bulls on draw in Cushing crude oil inventories at -3.64mn
• IGCS showing net-long retail positioning in WTI - US Oil, favoring downside

After a 12% drop at the beginning of February, Crude Oil Bulls are left with a dilemma. The fundamental bullish argument has not changed. However, the price shock that saw the price drop from ~$8/bbl has left more questions than answers.

The main argument of the Crude Bears has been the increased US Production weakening and potentially nullifying the efforts of OPEC. However, when looked at the OECD Crude Oil demand forecasts along with China import data, it’s difficult to ignore that more supply is what the market is demanding.

Recently, Saudi Arabia Energy Minister Khalid Al-Falih told reporters in Riyadh that if necessary, OPEC would push supply cuts to the point of presenting a small supply shortage. In short, as OPEC looks to be reaching their goal of getting supply to the five-year average, they remain hesitance to quitting too soon. The argument is that stockpile data may be inaccurate so OPEC will, “stay the course and make sure that inventories are where the industry needs them.”

Again, there are no guarantees in markets, but the key drivers of fundamental information from the global benchmark, OPEC and their production of Brent Crude seem to be working in favor of the Bulls, not the Bears of Oil.

The technical focus on WTI Crude Oil is currently at $63.50. While oil markets, alongside other risk assets, were arguably overheated as of January 25, the recent spike low that gave way to a bounce of lower high remains the technical line in the sand. An ability for WTI Crude Oil to break and close above $63.50 would align and favor a strong bounce.

Looking to momentum and oscillators, traders can see a lower low on multiple oscillators such as RSI(5) and MACD (12,26,9) as seen on the chart below, but a higher low on the price charts. The combination is known as the settings of a Positive RSI Reversal signal and seems to favor a resumption of the Bullish trend. Traders looking for confirmation should await a close above $63.50 before anticipating a move back to the high of January 25 near $66/bbl.

A move above $63.50 would align with a Bullish breakout per the Ichimoku cloud, which has been applied to the Crude Oil chart. Conversely, a break and close below $58.07, the February low would open up the potential for a much deeper reversal toward the 50% retracement at $54.34 or the 61.8% retracement at $51.44.

Crude Oil Price Fell to Technical Support As Fundamental Support Remained

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:

• Monday:JODI issues world oil exports, output data
• Tuesday: International Petroleum Week begins, speakers include AUE Energy Minister, BP CEO Dudley
• Wednesday 4:30 PM ET: API issues weekly U.S. oil inventory forecast (Delayed due to holiday)
• Thursday 11:00 AM ET: EIA weekly US Oil Inventory Report (Delayed due to holiday)
• 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 downside

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Oil - US Crude prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Oil - US Crude-bearish contrarian trading bias.