Crude Oil Weekly Fundamental Analysis, October 6 – October 10, 2014 Forecast

November Crude Oil futures plunged last week and are now in a position to challenge the low for the year at $87.85. This is followed by the April 2013 bottom at $84.41.

One reason for the weakness is the soaring U.S. Dollar. Since crude oil is dollar-denominated, each rally in the Greenback makes it more expensive to foreign traders. This leads to lower demand which consequently drives prices lower. With the strength in the dollar expected to continue, crude oil prices should remain under pressure over the near-term.

Also pressuring oil prices is European economic weakness, weaker demand from China, huge supplies and Saudi Arabia’s intention to hold on to its market share.

The Euro Zone economy is so bad that the European Central Bank is even planning more aggressive stimulus measures. Because of this, demand for crude oil is expected to continue to fall. While China may still be on solid ground, there are signs that its economy is feeling the effects of the weak economy in Europe. Its growth prospects are diminishing, also leading to lower demand for crude oil.

Recent data indicates that global oil production is rising in the U.S., Russia and Saudi Arabia. More efficient drilling methods are leading to greater production from U.S. drillers. Economic sanctions against Russian have forced the country to sell more oil than usual to generate cash.

Last week, Saudi Arabia drove prices sharply lower when it announced that it was cutting prices by about $1.00 a barrel to Asia and about 40 cents a barrel to the United States. This caught traders by surprise because they expected the Saudis to pull back production. Instead they chose to cut prices in an effort to retain buyers.

In the absence of geopolitical events leading to supply disruptions, look for oil prices to weaken this week. The situation between Russia and Ukraine, and the military action in Iraq and Syria are being watched by traders, but unless there is a direct effect on crude oil supply, no protective action from traders is expected. Even if there was a spike in prices to the upside, the move wouldn’t last long because of the huge amount of supply available.