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Oil price forecast for February 2020

By David Becker

The price of WTI crude oil could rebound back to the 200-day moving average near $57.50

Oil prices dropped sharply in the last week of January but are poised to bounce in February as prices are oversold. Production will likely continue to climb in the US, but this will offset by declines in OPEC output.

The sentiment is negative, as traders sold oil following news of the spread of the Chinese coronavirus which could hinder growth. Transportation will be the big loser in this game and in late January many carriers cancelled trips to China. However, oil prices initially dropped in 2003 as the SARs epidemic spread, but then rebounded and began to rally to all-time highs five years later.

Oil price analysis: production

Production in the US has generated headwinds for oil prices. The US has increased daily production to 13 million barrels a day according to the Energy Information Administration. That is up from 11.9 million barrels a day at the same time in 2019. This provides a cushion that keeps prices stable if there is a supply disruption.

Rigs counts are stabilising

Oil rig counts is a metric that provides a view of future oil production and willingness of gas and oil companies to invest. The rig count has declined 26 per cent year over year and should continue to ease if prices fall. However, recently the count increased. According to oil service giant Baker Hughs, the oil rig count was 676 versus 673 in the week ended January 17.

The US Department of Energy believes that production will rise in 2020 but the acceleration in production will be less than previously thought. The EIA also expects the US rig count to continue to decline during 2020 which should weigh on production.

After hitting a high of $65.65 in January, prices tumbled nearly 21 per cent and are holding steady near support. A close below $52, could lead to a test of the $50 level. If prices hold, there could be a rebound back to the 200-day moving average near $57.

Oil price technical analysis

Oil prices are oversold. The decline in price action have pushed the relative strength index (RSI) down to the 25 level, which reflects an oversold condition. Levels below 30 are considered oversold on the RSI while levels over 70 are considered overbought. Additionally, the fast stochastic has generated a crossover buy signal in oversold territory. The current reading on the RSI is 10, below the oversold trigger level of 20 which could also foreshadow a correction. Prices have remained in a range between $50 and $65 for the past 12 months and should continue to trade in this range during February.

Oil price forecast

Oil prices have tumbled and provided good risk-reward for those who are looking to capture a rebound in prices. If the oversold nature of price action keeps oil steady, the price of WTI crude oil could rebound back to the 200-day moving average near $57.50. The risk-reward is good for short-term trade. The technicals point to a rebound, and declining rig counts should benefit the supply and demand balance.

FURTHER READING: Energy stocks: how will the worst-performing sector of the S&P 500 do in 2020?

FURTHER READING: Oil price predictions for 2020 and beyond

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