Forget About OPEC Support; Here is Where Oil Prices Are Heading This Week

Last Week Oil Market Data

Despite recent comments by OPEC members to support oil prices, and a weaker US dollar, last week oil market data point toward a negative oil market outlook this week and in the short-term. It is expected that oil prices will face a high resistance to move upward and a huge risk of a possible drop this week. The reasons behind the pressure on oil prices is due to last week’s sharp increase in US rig count, uptick in US crude oil and gasoline inventories as well as expectations of an increase in US crude oil production by OPEC and the EIA in their latest reports.

Rig Count:

US rig count increased sharply last week. According to Baker Hughes rig count service, U.S. rig count jumped higher by 35 to 694 rigs last week. Around 29 of the added rigs last week were rigs drilling for oil, driving the number of active rigs drilling for oil up to 551 rigs which is 41 rigs up from the same period last year. Gas rigs were also up by 6 rigs to 142 last week. At its current level, active rigs drilling for gas in the United States is 15 rigs above the count for the same period last year. In general, US rig count is 57 rigs up from the same period last year.

The sharp increase in US rig count is shifting the attention of traders and investors from OPEC’s comments and its production cut toward the development in shale oil. With the recent expectations by OPEC and the EIA of an increase in US crude oil production, US rig count will be used to measure how true are these expectations. Continuous increase in US rig count in the coming week will validate that these expectations are right and that the oil market is set to face another period of high volatility and sustained prices around $50/bbl.

US Crude Oil Production:

Following a sharp increase in US crude oil production two weeks ago as reported by the EIA, US crude oil production decrease by 2,000 last week from 8,946,000 to 8,944,000 barrel per day to the week ending January, 13.

US Crude Oil Production

A figure that only shows the resistance of US crude oil production and the potential for further increases in the coming weeks. In fact, with the recent increases in US rig count, we could see US crude oil production above 9,000,000 during the next month.

US Crude Oil & Gasoline Stockpiles:

US crude oil inventories increased slightly last week. According to the data published by the Energy Information Administration ( EIA ) last week, US crude inventories increased by 2.3 million to around 485.5 million.

Brent Crude Oil Price

In a similar trend, US gasoline inventories also increased by 6.0 million. The increase in both US crude oil and gasoline inventories put a huge pressure on oil prices last week pushing Brent crude and WTI to fall to around $54/bbl and $51/bbl respectively.

OPEC Monthly Oil Market Report:

In its Monthly Oil Market Report published on January 18, OPEC reported a decrease in its oil production for December last year. According to the cartel’s MOMR, OPEC’s production decreased by 221 tb/day to average 33.08 mb/d. That was a good news which showed that the cartel could finally cut its oil production and stick to its oil output cut accord. However, a negative news that had limited the gains in oil prices was OPEC’s expectations about US oil output growth. According to OPEC’s report, in 2017, non-OPEC oil supply is projected to grow by 0.12 mb/d, representing a downward adjustment of 0.18 mb/d. Downward revisions to Russia, Kazakhstan, China, Congo and Norway, were partially offset by a 0.23 mb/d upward adjustment to US supply.

This Week Oil Price Forecast:

The overall outlook for oil prices this week and in the short-term is quite negative. Looking at last week oil market data and news, it is clear that oil prices are set to face another week of high pressure following two weeks of sustained pressure. Despite the support by OPEC’s members last week, particularly coming from Saudi Arabia, and a weaker US dollar, oil prices are set to face high volatility and a possible drop this week. It is highly expected that oil prices could test new lows this week.

Oil Price Forecast for This Week

Brent crude and WTI are expected to fall by 2 percent this week. It is also expected that data reported by the EIA and Baker Hughes could show increases in US crude stockpiles, oil production and rig count. If these expectations are true, WTI could fall below $50/bbl this week. Even if OPEC members were to support oil prices this week by throwing more comments, which is highly likely, the fact that the focus of oil traders and investors shifted from OPEC’s oil output cut to focus more on shale oil related news as the real impact of OPEC output cut on oil prices is already accounted for will limit how effective these comments will be to support oil prices.

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Remark: The expectation of oil prices’ direction in this commentary are based on the oil market data and news up until the time of writing this commentary. As the week starts, new data and news are reported and could influence oil prices differently. Therefore, the direction of oil prices cloud be different from what was expected here. It is important to stay updated with oil market data and events as they occur.