Oil Price Fundamental Weekly Forecast – Traders Waiting for Hurricane Damage Assessment

U.S. West Texas Intermediate and international-benchmark Brent crude oil posted an inside move, lower close last week, suggesting investor indecision and impending volatility. Light volume and the lack of any major fundamental developments helped hold the markets in a tight range. The week finished with traders focusing on a hurricane heading toward a major petroleum production area in Texas.

October WTI crude oil settled the week at $47.87, up $0.44 or +0.93% and November Brent crude oil closed at $51.98, up $0.32 or +0.62%.

Fundamentally, the U.S. Energy Information Administration reported U.S. crude inventories fell 3.3 million barrels last week, compared with trader expectations for a decrease of 3.5 million barrels. Crude stocks at the Cushing, Oklahoma, delivery hub fell 503,000 barrels.

U.S. Gasoline inventories were down 1.2 million barrels compared with analyst expectations for a 643,000-barrel decline.

Prices barely moved on the potentially bullish news partly because of the crude supply glut. Rising U.S. production is primarily behind the glut. It has jumped by 13 percent since mid-2016 to 9.53 million bpd, close to its 9.61 million bpd record from June 2015.

The soaring U.S. output, has caused the discount of WTI crude to Brent to rise to its widest in almost two years at 4.69 per barrel. Deeply discounted WTI makes U.S. crude exports attractive. Recent shipments to Asia and Europe hit a combined record of over 450,000 bpd during the first half of the year.

In other news, Baker Hughes reported the number of rigs operating in U.S. oil fields fell by 4 to a total of 759 rigs.

Forecast

The fundamentals suggest there is plenty of crude oil around to hold the market in a range over the near-term, however, the focus this week will be on the damage caused by Hurricane Harvey, which made landfall over the week-end in Texas.

At the end of last week, refineries, terminals, production platforms and other infrastructure were shutting down as the hurricane approached key U.S. petroleum areas off the central Texas coast.

The immediate issue is not about crude oil, but gasoline production. At the end of last week, gasoline prices were soaring to their strongest levels in four months and were the highest in two years for this time of year.

U.S. gasoline crack spreads, a key measure of margins, are at their strongest levels in five years for this time of year.

The general tone of the market is expected to be bullish with most of the gains going to gasoline. Crude’s gains may be limited because of demand concerns. However, traders could raise supply issues if the oil fields are flooded by the hurricane’s torrential rains.

The size and duration of any rally will be determined by infrastructure damage and whether the flooding leads to a prolonged shutdown of refineries and oil fields. At this time, we have to believe there is a strong chance for a gap higher opening in crude oil while professionals assess the damage.