Brent Oil Forecast: Downside risks are intact

Oil prices are trading on the back foot this Thursday on rising US fuel inventories and words of caution from the Paris-based International Energy Agency. At the time of writing, Brent is trading at $56.50 levels. Prices ended yesterday with marginal gains at $56.49 levels.

News/Data

The IEA monthly report says-

  • The global demand growth forecast is held unchanged at 1.6 million bpd in 2017 and 1.4 million bpd in 2018.
  • For 2017, non-OPEC supplies of oil are expected to grow by 0.7 million bpd followed by a 1.5 million bpd rise in 2018.
  • Global stock builds, rising non-OPEC production and sluggish growth in demand could cap the rally in oil prices
  • Our current numbers for the first quarter of 2018 imply a stock build of up to 0.8 million bpd. Taking 2018 as a whole, oil demand and non-OPEC production will grow by roughly the same volume and it is this current outlook that might act as the ceiling for aspirations of higher oil prices.
  • Rebalancing is happening more slowly than most producers who signed up to global output deal had expected.
  • The surplus of oil stocks over a five-year average in the OECD (Organization for Economic Co-operation and Development countries) is slowly coming down.
  • Continued discipline is necessary to rebalance the market in 2018.

The American Petroleum Institute (API) data released late Tuesday showed the oil stocks rose by 3.1 million barrels to 468.5 million barrels last week.

President Donald Trump is threatening to impose sanctions on Iran. Last time this happened, the supplies dropped by 1 million barrels per day (bpd).

Venezuela, an OPEC member with huge oil reserves, is battling an economic and political crisis. 

Technicals - Bullish above $57.14

Daily chart

The technical view remains unchanged. Despite the bullish Doji reversal, Oil is not out of the woods yet as prices need to close above $57.14 (Oct 6 high), in which case doors would open for a rally to $58.85 (Sep 26 high).

On the downside, a break below the previous day's low of $56.03 could yield a sell-off to $54.95-$54.85 levels.

The IEA report is somewhat bearish, given the agency feels the rebalancing is happening at a slower pace. There is growing consensus in the market that OPEC and other major producers are likely to extend the output cut deal beyond March 2018, despite which oil is struggling to build bullish momentum. The downside risks remain intact and only a move above $57.14 would revive the bullish mood. 

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