Oil’s Near-6% Drop May Pave The Path For Improving Fundamentals

Fundamental Forecast forUSOIL: Neutral

Talking Points:

North American Oil Production at highest output levels since August 2015, per EIA

Crude Oil Price Forecast: Downside Stalls on OPEC Favoring Extension

Sentiment showing retail traders flipped to net-long favoring ST downside per contrarian effect

Baker Hughes Rig Count Rises 5 Total to 688, 1 Added In Permian, 3 In Eagle Ford Shale

Will Oil Resume Its Downtrend in 2Q?

You wouldn’t know it by looking at the charts, but there was more encouraging news from OPEC as well as a US Inventory Draw on Wednesday per the EIA weekly release. Earlier this week, we heard that major oil producers had reached an initial deal to extend the output cut as cited per Saudi Arabia’s oil minister. The original goal of curbing production was to get stockpiles below the 5-year average, which has not been accomplished yet and seems to be a driving force for continuing the production cut another 6-months. While the producers admittedly look beyond the day-to-day price action, we could see price drops further encourage producers to approve the production cut extension. Additionally, many institutions remain upbeat on Oil as OPEC’s Technical Committee said on Friday in Vienna that the proposed 6-month extension was needed to help balance the market.

While there was an inventory draw in the US for crude Oil, we did have two discouraging findings that have carried further weight on the sell-off this week. First, Gasoline stockpiles rose for the first time in nine weeks, which was seen as a cue that demand may be waning though this aligns with typical seasonal effect. Secondly, US Production levels have reached their highest levels since August 2015. It is worth noting that the slope of active rigs in the US is expected to flatten, but there still appears to be concern that this trend could foil the efforts of OPEC to put the supply picture in a net deficit, which the IEA continues to predict for H2 2017. On Friday, we got word that the Baker Hughes Rig Count had risen by 5 active rigs to 688, 1 Added In Permian, 3 In Eagle Ford Shale. The USOil chart appears to have caught the attention of value buyers per the IG Client Sentiment discussed below. We see a move lower in the week that totaled roughly 5% making this week’s drop the largest since March. Recent sell-offs of this magnitude have not had staying power since we traded above the 55-WMA for the first time in multiple years in Q2 2016.