Oil Fundamental Forecast
Oil prices traded nearly flat on Monday as investors digested last week’s steep sell-off while waiting for another string of supply data on Tuesday with the American Petroleum Institute weekly report and on Wednesday with the weekly report from the U.S. Energy Information Administration.
On Monday, U.S. May West Texas Intermediate Crude Oil closed at $48.94, down $0.09 or -0.18%. International May Crude Oil finished the session at $51.35, down $0.02 or -0.04%.
Additionally, new government data showed that shale oil production in April was set for its biggest monthly increase since October as output in the Permian Basis, America’s fastest growing shale oil region, was expected to hit another record high.
After Monday’s limited price action and low volume, volatility could return to the crude oil market on Tuesday after OPEC releases its monthly oil report. The markets could get hit hard if the news is bearish because there are still a large number of hedge fund longs holding positions. If they are forced to sell their positions then we could see another bloodbath.
On Wednesday, the International Energy Agency will release its monthly oil report. It too could trigger a volatile reaction with the market most vulnerable to the downside.
Now that WTI crude has breached the psychological $50.00 barrier, this price could act like resistance. The current chart pattern suggest the May futures contract is vulnerable to at least $47.90 then $45.78 before the selling pressure really begins to heat up once again.
Some traders are arguing the market is oversold which could limit the downside pressure. It also makes the market vulnerable to aggressive short-covering and profit-taking.
However, given the current fundamentals, any rally is likely to be short-lived and met with another round of hedging pressure. Sometimes a market has to move higher in order to set up the next major sell-off because many investors have a hard time selling weakness.
At this point, the only way I can see a strong rally taking place over the near-term is if OPEC and other non-members start to talk about extending the program to limit output, trim supply and stabilize prices.