FUNDAMENTAL FORECAST FOR USOIL: BULLISH

Talking Points:

• The ONE Thing: The crude bull train does not appear to be slowing down. Crude oil has been on a historic run to recently tag the 100% Fibonacci expansion, but increasing demand and potential supply shocks favor further strengthening of the energy market.
• Energy stocks show biggest S&P 500 contribution since 11/2014 and projections from quarterly earnings show what could amount to a near 5% gain to the index from the sector alone in the coming quarter as profit margins swell with WTI north of $70/bbl.
• Per BHI, U.S. Oil Rig Count rises 10 rigs to 844, US total rig count up 13 to 1,045.
• The technical analysis picture of Crude Oil clearly shows price trading above multiple forms of support. Key support comes from Tuesday’s spike low that aligns with the 50% retracement of the 2014/2016 range at $67.56/bbl. Bullish targets are $77 for WTI and $82 for Brent.
• IGCS shows net-short retail positioning in WTI - US Oil, favoring bullish pressure

As crude oil booked another weekly gain on renewed Iran sanctions that helped breed supply shock concerns. Crude oil traded to the highest levels since November 2014 on both WTI & the global benchmark, Brent at $71.89 and $78/bbl respectively.

Higher for Longer? The Likely Reality for Crude

Early last month, I quoted the chief economist of the IEA who said crude bulls should be careful what they wish for because they just might get it. It is higher prices and looking down the swap curve through 2022 after Trump’s withdrawal from the Iran Accord has a message, get ready for higher prices for longer.

Looking to Brent crude swaps curve (prices over time), all future swaps were above $60/bbl for the first time since November 2015. With longer dated swaps lower than front-dated swaps over the last few years, the rising 2022 swap above $60 shows that risk is on for crude oil bulls and the US’ oversupply is losing argumentative ground to undersupply from OPEC.

Another way to look at the market’s mood toward an asset it options and specifically the options skew. Last week, options traders began demanding a bigger premium for bullish calls relative to puts. The bullish skew is rather rare and has only been seen a few times since 2014 according to Bloomberg due to hedging pressures. Either way, the bullish skew shows the market is looking higher for now.

Technical Focus for Crude Oil – Tuesday’s Aggressive Pivot Marks Support

As said before, trends do not die of old age. What’s more, a technical development helps to show strong support within the uptrend on Tuesday’s low.

The first key support zone comes from a Tuesday morning’s pivot ahead of Trump’s announcement to withdraw the US from the Iran nuclear deal. As false news leaks were reporting Trump would stay in the deal, oil sold to an intraday low of $67.63 for WTI, which aligned with the 50% Fibo of the 2014/2016 range.

After the report came out, Crude traded 6% higher by Thursday to $71.89. Last week’s low will now be a firm support point to show a higher ground for which the bulls have established confidence in their view.

With price remaining above $67.63/bbl, you may hate the trend, but it’s likely not worth fighting it. Me? I will continue to look for higher prices yet with a bullish target to the 61.8% retracement of the 2014/16 range at $76.99/bbl.

Chart Source: Pro Real-time®, an IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT

Next Week’s Data Points That May Affect Energy Markets:

THE FUNDAMENTAL FOCAL POINTS FOR THE ENERGY MARKET NEXT WEEK:

• Monday: OPEC monthly oil market report, including supply/demand
• Monday: U.S. EIA Drilling Productivity Report forecasts and estimates of OPEC’s April production levels
• Monday: Rosneft releases earnings
• Tuesday 04:30 PM ET: API Weekly Oil Inventories Report
• Wednesday 10:30 AM ET: EIA issues weekly US Oil Inventory Report
• Wednesday: IEA monthly oil market report, including supply/demand forecasts and estimates of OPEC’s April production levels
• Friday 1:00 PM ET: Baker-Hughes Rig Count
• Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts

Crude Oil Insight from IG UK Client Sentiment:Contrarian view of retail positioning favors bullishness

Source: IG UK Client Sentiment Readings on DailyFX

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Oil - US Crude prices may continue to rise.