Crude oil traders shrugged off potentially negative news to post a strong close for the week. The news wasn’t all negative so let’s call it mixed, but with most traders focused on increasing U.S. production and the rising rig count, the price action suggests that the negative news may have been already been priced into the market and that traders feel the downside is limited and that the way of least resistance is up.
September West Texas Intermediate crude oil settled at $46.75, up $2.36 or +5.32% and international benchmark October Brent crude oil finished the week at $49.17, up $2.19 or +4.66%.
First, last week’s bearish news. At the start of the week, the upside was limited due to rising U.S. production, steady growth in producing oil rigs and increasing production in Libya and Nigeria.
Several banks issued bearish forecasts with Goldman Sachs saying prices could fall below $40 if the market doesn’t get a clear catalyst to buy. The catalyst could be further intervention by OPEC or a steady drop in U.S. crude stockpiles and the nation’s rig count, the bank said.
Late in the week, the International Energy Agency even warned the oil market could stay oversupplied for longer than expected due to rising production and limited output cuts by some members of OPEC.
On the bullish side, the market was supported by U.S. Energy Information Administration remarks from early in the week calling for U.S. crude oil production to rise by less than previously forecast next year due to a lower price outlook.
Weekly U.S. government inventories even fell more than expected.
Saudi Arabia’s threat to reduce exports in August was also seen as a potentially bullish development. Early Thursday, reports of strong demand from China eased concerns of an ongoing fuel supply overhang.
Bullish traders didn’t seem to mind the two-sided trade and the strong close on Friday made it look like they had shrugged off the negative news, putting the market in a position to extend the rally this week.
I don’t think it was one particular story this week that fueled the turnaround. I think that buyers recognized value early in the week on the dip on Monday and the rest of the week, these investors successfully defended their positions against sellers.
Forecast
Baker Hughes reported on Friday that the number of active oil rigs in the United States increased by two last week. There was some selling after this news was released, but the markets held on to their gains. Since traders had a chance to react to the potentially bearish news on Friday, but chose to hang on to their gains, we could see a firmer on Monday.