Oil prices have now broken out to levels not seen since summer 2014 and market participants are now questioning whether the move has further to go or if a correction lower is in store. So what are the forces that are driving crude oil price action?
Crude Oil Inventories Falling
One of the key factors driving crude oil price has been the withdrawal in US crude oil inventories over recent weeks. US crude oil inventories have fallen by over 34 million barrels since the beginning of December 2017 with the last EIA reported stock build coming in November last year. Currently, crude oil inventories in the US stand at 420million barrels, now only just above the five-year average of 407.2 million barrels. The drawdown in inventories is particularly significant given that in March 2017 they were up around 536 million, a record high.
US Rig Counts Rising
While the trajectory of inventories is clearly supporting the price of oil at the moment, there are risks. The latest Baker Hughes data shows a 10 unit increase in the number of active rigs in the US over the last week with 752 rigs now active across the country. This is the largest weekly increase since July 2016 and clearly reflects increased production enthusiasm in response to higher crude prices globally.
In its latest Short Term Energy Outlook, the EIA revised higher its 2018 US oil production higher, from 10 million to 10.3 million barrels per day over 2018. If the US rig count continues to grow it is likely that the EIA’s forecasts will take on much more importance.
BoAML Lifts Price Forecasts
In response to the shift in price, many major banks and institutions are now revising their price forecasts higher. Bank of America Merrill Lynch and Morgan Stanley have both recently lifted their price forecasts. BoAML now forecast the market to be undersupplied by around 340k barrels per day over 2018, up from the prior 100 bpd forecast, with US crude now forecast to hit $60 over 2018, up from $52 previously.
The bank says the premise for this shift in target is that the oil market has been long over-supplied and is now tightening at a quicker than expected rate due to a synchronized uptick in global growth and the impact of production cuts by OPEC and Russia.
Goldman Warns of Correction Lower
However, Goldman Sachs warns that the moves in Oil are at risk of overshooting and note that, the increase in US oil production highlights the risk of a correction lower. The bank also highlights the potential for the OPEC cuts to take inventories down past the group’s target level, cutting too deeply.
Geopolitical Tensions Supporting Price
Another factor that is driving crude oil price is the geopolitical environment. Recent protests and demonstrations in Iran over the last several weeks, which have included violent clashes between protestors and authorities, have reminded the market of the Arab Spring events which resulted in significant disruption to the oil market. While as yet, there have been no reports of any disruption to the Oil market, signs of unrest in the country will certainly be closely watched by speculators.
Positioning Suggests Risk Of Correction Lower
As you can see, speculative positioning in crude has been building steadily over the last six months and is now sitting just under its 2017 highs. While the position is clearly stretched to the upside, looking at the last time that positioning was at this level suggests that even if we see a pullback in positioning, the bullish price trend has plenty of room to continue.
From a technical perspective the rally in Crude has taken price up to an interesting level.
On the monthly chart you can see that price has challenged, and found resistance, at a retest of the September 2009 low at 65.08. While this resistance holds, focus will be on a retest of the broken 2015 high at 62.39. If this level holds as support, focus will remain on a further upside run with the next key resistance level sitting at 67.07, a retest of the May 2010 broken low.
On the weekly chart you can see that price is stalled at the resistance trend line of a wedging pattern which suggests a short term correction lower. If price breaks down below the 62.39 level, deeper support can be found at the rising trend line of the wedging pattern along with the retest of the broken 2016 high around 55.42.