Oil futures ended April with a monthly gain of nearly 20%, but the ride wasn't a smooth one and volatility will likely prevail in the weeks to come as traders navigate conflicting clues on the outlook for crude. "There certainly seems to be a lot of factors pressing on oil prices, yet they keep finding new legs," said Kevin Kerr, managing editor and executive publisher of Commodities Watch. West Texas Intermediate crude CLM6, -0.09% settled at $45.92 a barrel on Friday, up 19.8% from the front-month contract finish of $38.34 on March 31. Brent crude LCOM6, +0.00% ended at $48.13, up over 21% from the front-month contract settlement at the end of last month. "On a fundamental basis, the lack of any type of real cut in production, and a seeming indefinite impasse within and out of [the Organization of the Petroleum Exporting Countries] would strongly point to lower prices," said Kerr. But "technically, the charts remain bullish," with upside capped at around $62 to $65 a barrel. The first half of the month saw traders focused on expectations that major oil producers, including Saudi Arabia and Russia, would reach an agreement at an April 17 meeting to freeze their crude production at January levels. They failed. The talks, however, failed to produce an agreement, prompting some analysts to forecast a drop to $30 within days. Instead, after a brief decline, oil made new highs. Bullish traders looked for the global glut of crude inventories to subside on the back of continued declines in U.S. output and rig counts, strong gasoline demand, and a three-day strike by oil workers in Kuwait that trimmed the nation's production. Then, an OPEC official raised the possibility that the cartel will bring up the output freeze topic again at its June 2 meeting in Vienna. Adding even more confusion to the oil mix, news report earlier this week said that Saudi Arabia's state-owned Saudi Arabian Oil Co. was poised to complete the expansion of its Shaybah oil field by the end of May, boosting its capacity to 1 million barrels a day. That would contribute more oil to the world-wide glut. ‘The Saudis talking about moving away from oil as revenue source is pretty much fantasy and they know it. Their bread and butter is made with oil...'Kevin Kerr, Commodities Watch Around the time of that news, however, the kingdom also announced an economic reform plan aimed to steer the country away from its dependence on oil. See: Meet the 30-year-old prince leading the charge to wean Saudis off oil "The Saudis talking about moving away from oil as revenue source is pretty much fantasy and they know it," said Kerr. "Their bread and butter is made with oil and at these price levels, it is putting the pinch into their economy." -Waiting for balance- Still, there are some convincing signs that point to higher ground for oil. The "overcapacity on the supply side is shrinking rapidly while demand-wise, big players like China are stepping up their purchases," said Nico Pantelis, head of research at Secular Investor. China's crude imports in March were the second highest on record. U.S. government data on Wednesday revealed a seventh straight weekly decline in total domestic oil production. At 8.938 million barrels a day, it's down nearly 1 million barrels from the 9.22 million it was at for the week ended Jan. 1. Jay Hatfield, president of InfraCap and portfolio manager of the InfraCap MLP exchange-traded fund AMZA, +2.34% said U.S. oil production has declined by over 600,000 barrels from its peak level and will likely continue to decline through the rest of the year—possibly by another 500,000 barrels by the end 2016. Added to that, gasoline demand is running about 5% higher over last year, representing additional demand of roughly 500,000 barrels of oil, he said. So a total reduction of 1.1 million barrels in domestic production, combined with the increase in demand of 500,000 barrels "will bring the global market for oil into balance and is likely to maintain the price of oil in the $40-$50 range for the rest of the year," said Hatfield. If nothing else, traders can probably be sure of more volatility to come. "Until something gives either way, we stay fairly range bound and key off of good old supply and demand," said Kerr. The "weekly [petroleum] inventory report, as well as rig counts and refinery capacity, will be the driving force for traders right now," between $45-$48 on the low end and $60-$65 on the high end for WTI, he said. The wild cards, at least when it comes to figuring out demand for oil, are the petroleum products, said Kerr. That will be primarily gasoline as the market gears up for the summer driving season and, as we get into the fall season, heating oil, he said. "For the meantime, the world watches and waits to see what happens next," Kerr said.
