U.S. West Texas Intermediate and international-benchmark Brent crude oil finished the week lower for the first time since the week-ending December 15. The futures markets posted technically bearish closing price reversal tops which could trigger the start of a 2 to 3 week correction. The catalyst behind the selling pressure was concern over rising U.S. production.
Prices surged early in the week to levels not seen since December 2014 after the big investment banks raised their price targets for oil.
Bank of America Merrill Lynch and Morgan Stanley both upped their forecasts for crude oil prices this week, while Goldman Sachs said the risks of prices overshooting its current targets are mounting.
The banks based their forecasts on evidence that the long-oversupplied oil market is tightening up more quickly than expected as global economic growth fuels demand and the OPEC-led production cuts help trim the excess global supply.
The bank reports had a “buy the rumor, sell the fact” effect on the markets, causing them to close lower after reaching a new high for the year.
Another sign of weakness was the muted response to another drawdown in weekly inventories.
The U.S. Energy Information Administration also reported that U.S. crude oil production stood at 9.75 million barrels per day (bpd) on January 12.
Finally, on Friday, the International Energy Agency (IEA) reported both bullish and bearish information in its monthly report, but the bearish news outweighed the bullish news.
The IEA said that global oil stocks have tightened substantially, aided by OPEC cuts, demand growth and Venezuelan production hitting near 30-year lows. However, it also warned that rapidly increasing production in the United States could threaten market balancing.
“Explosive growth in the U.S. and substantial gains in Canada and Brazil will far outweigh potentially steep declines in Venezuela and Mexico,” the IEA said of 2018 production.
The IEA said it expects this to soon top 10 million bpd, overtaking OPEC giant Saudi Arabia and its partner in the plan to trim the excess global supply, Russia.
In other news, the U.S. oil rig count fell by five rigs in the week through January 19, according to Baker Hughes.
The chart pattern suggests crude oil prices should remain under pressure for 2 to 3 weeks. The move won’t be a trend changing event, but designed to alleviate some of the upside pressure. The markets may have also been saturated by aggressive hedge fund buying.
If the hedge funds decide to book profits then the correction should be orderly. I don’t expect them to initiate new short positions.
Additionally, although traders focused on the bearish side of the IEA report late last week, there was a bullish side. If traders decide to shift their focus to this and reports of increasing demand then the sell-off should be quick and short.
On the bearish side of the equation, a combination of hedge fund liquidation and concerns over rising U.S. production could drive the WTI futures contract into $60.41 to $59.38 over the near-term.