Oil Price Fundamental Daily Forecast – Aggressive Hedgers Betting on Drop in U.S. Inventories

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are inching lower early Friday, following Thursday’s steep rise. Traders said yesterday’s nearly 2 percent rise was fueled by aggressive hedge buying tied to an industry report suggesting domestic crude stockpiles would soon decline again after a surprise rise in the latest week.

At 0653 GMT, September WTI crude oil is trading $68.93, down $0.03 or -0.04% and October Brent crude oil is at $73.40, down $0.05 or -0.07%.

Traders said prices rallied early in the session when industry information provider Genscape reported that crude inventories at the Cushing, Oklahoma delivery hub for U.S. crude, dropped 1.1 million barrels since Friday, July 27.

Helping to push prices lower earlier this week have been a combination of factors. On Wednesday, prices plunged when the U.S. Energy Information Administration reported that in the week-ending July 27, total U.S. inventories rose 3.8 million barrels, while supplies at Cushing fell 1.3 million barrels.

Throughout the week, gains were limited and prices pushed lower on concerns about oversupply. Recently, Saudi Arabia, Russia, Kuwait and the United Arab Emirates have increased production to help compensate for an anticipated shortfall in Iranian crude supplies once U.S. sanctions take effect and to stabilize prices to prevent a global economic slowdown, which would lower demand.

Forecast

September WTI crude oil has been essentially rangebound since the July 10 top at $72.98. Based on the mid-June to mid-July trading range, the 50% to 61.8% retracement zone is $67.99 to $66.81. The market has been straddling this zone since the July 18 bottom at $66.29. Yesterday’s low occurred inside this zone.

The short-term range is $72.98 to $66.29. Its retracement zone at $69.64 to $70.42 stopped the rally earlier this week at $70.43.

The price action suggests the fundamentals are balanced at this time especially with the production loss from the Iranian sanctions being offset by the output increases from Saudi Arabia and other non-OPEC producers.

The market is not expected to remain rangebound or balanced for long, however. There are potential escalation events that could trigger a huge move to the upside, or a huge move to the downside. All the charts are indicating is that volatility is coming, but they are not indicating direction.

One particularly bullish factor showed up on Thursday in the form of an expected drop in U.S. inventories. The next is a little more speculative. It concerns possible military exercises by the Iranian navy in the Gulf.

On the bearish side, an escalation of trade tensions between the United States and China could force China to impose additional duties on oil and refined products imported from the U.S. This would lead to a drop in demand and a possible increase in U.S. inventories.