Crude Oil Price Forecast: Sentiment Remains Weak

Oil fell back into its familiar trading range of $65 to $70 per barrel last week after making a brave attempt to break above $70 on Tuesday. A mixed oil inventory report from the U.S. EIA added to slowing price momentum. Despite the country's crude oil inventories falling 4.3 million barrels in the weekly bulletin, a surprising build in gasoline and distillate inventories suggests that the peak summer driving season has ended and demand could weaken.

Next week, traders and analysts will get updated market information from the IEA, EIA and OPEC as all three are set to release their respective monthly market reports. First up is the EIA's short-term energy outlook on Tuesday, where traders will be interested in the administration's oil price expectations. In the August report, the EIA said that it expects monthly average Brent oil to remain at $70 to $73 per barrel from August 2018 through the end of 2019. Brent closed on Friday at $77.03.

Next up is OPEC's report on Wednesday. Traders and analysts will be looking for changes in OPEC's supply and demand forecasts. Last month, OPEC revised down its 2019 world oil demand growth forecasts by 20,000 barrels per day (b/d) to 1.43 million barrels per day (mb/d) due to weaker-than-expected demand from Latin America and the Middle East.

At the same time, OPEC revised up its world supply growth forecasts, stating, "Non-OPEC oil supply in 2019 is projected to reach an average of 61.75 mb/d, indicating an upward revision of 106,000 b/d, mostly due to a re-assessment of the Chinese supply forecast next year." A widening gap between lower demand and higher supplies in OPEC's updated report will likely put downward pressure on prices.

Later in the week, the market will get an update from the IEA on Thursday. Last month, the IEA noted a material slowdown in global oil demand growth in 2Q18 and 3Q18 with predictions for a rebound in 4Q18. Traders will be closely looking for changes to this prediction to gauge short-term price direction. The IEA also said that it expects global oil demand in 2019 to increase by 1.5 mb/d. Changes to the 2019 forecast could shape medium-term price expectations.

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Oil analysts remain bullish about rising oil prices despite some recent price resistance. They predict an increasingly tight oil market that could take prices over $90 per barrel before the end of 2018. The central thesis is that looming sanctions against Iran will soon cripple global oil supplies.

OPEC crude oil production rose in August, however, to the highest level this year, and a trade war with the U.S. could hit future Chinese oil demand. The market eagerly awaits a final decision from U.S. President Donald Trump, who warned on Friday that he was ready to implement trade duties on another $267 billion in Chinese goods on top of $200 billion in imports already flagged for tariffs. Economists estimate that this is the entire amount of products the U.S. imports from China, and tariffs could tip the global economy into recession if the president fully implements this policy. The uncertainty around such a scenario does not paint a bullish picture for oil markets.

Oil lost the upward momentum it found in late August and re-entered its previous trading range after moving as high as $71.40 last week. Tuesday was particularly volatile, with oil closing just below $70 per barrel in daily price action that produced a classic doji pattern. Oil traded down for the rest of the week and closed at $67.75 on Friday.

This latest price action means technical indicators are once again producing neutral trade signals. For example, the 21-day exponential moving average sits just below the 55-day moving average, and the fast line of the moving average convergence divergence (MACD) momentum indicator is poised to dip below the neutral zero level. Readings below zero tend to indicate price weakness and a downtrend.

Technical signs on the daily price chart are negative with seven sell signals, two neutral and one buy. Moving averages are also negative with all except the 200-day moving average signaling a sell. Higher timeframe technical patterns on weekly price action currently shows a neutral position with three sells, three neutral and four buy signals.

Bulls can take some comfort from prices being bid up after touching $67 for two days last week, indicating that buyers are stepping in at those levels. The current sideways market trading, however, is tough to navigate and volatile fundamentals are not helping.

Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment or trading advice. Price chart courtesy of StockCharts.com.