Oil Price Fundamental Daily Forecast – Bouncing Back from Weak U.S. Factory Orders Report

Monday’s price action indicates that any news about potentially lower demand will have a negative effect on prices. However, the price action also indicates that the potential for lower supply due to the Venezuelan sanctions and the OPEC-led cuts will continue to provide support.
James Hyerczyk
Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are inching higher on Tuesday as investors try to claw back some of yesterday’s losses. Longer-term support is being provided by the OPEC-led production cuts. Shorter-term support is being provided by the U.S. sanctions on Venezuela. This comes one day after both WTI and Brent reached their highest levels of 2019.

At 10:49 GMT, March WTI crude oil is trading $55.11, up $0.55 or +1.03% and April Brent crude oil is at $62.97, up $0.46 or +0.74%.

Rally Stopped by Drop in New Orders

Monday’s rally came to a halt and prices reversed sharply to the downside after a government report showed new orders for U.S.-made goods unexpectedly fell in November amid sharp declines in demand for machinery and electrical equipment. The weak report suggested a slowdown in manufacturing as 2018 ended.

Factory goods orders fell 0.6 percent, the Commerce Department said, after an unrevised 2.1 percent drop in October.

Bullish Factors

The main factor underpinning crude oil prices is the OPEC-led production cuts. According to a Reuters survey from last week, supply from OPEC states had fallen the most in two years, as Saudi Arabia and its Gulf Arab allies over-delivered on pledged cuts, while Iran, Libya and Venezuela registered involuntary declines. The cuts in output are designed to trim the global supply glut while stabilizing prices.

U.S. sanctions on Venezuela also have traders focusing on tighter global supplies.

“Fresh U.S. sanctions on the country could see 0.5-1 percent of global supply curtailed,” said Vivek Dhar, mining and energy analyst at Commonwealth Bank of Australia.

Daily Forecast

Monday’s price action indicates that any news about potentially lower demand will have a negative effect on prices. However, the price action also indicates that the potential for lower supply due to the Venezuelan sanctions and the OPEC-led cuts will continue to provide support.

As long as OPEC and its allies continue to maintain discipline and adhere to their plan to trim the excess supply then prices should remain underpinned.

Volume is expected to remain light because of the Lunar Holiday in Asia. This makes the markets vulnerable to exaggerated two-sided trades. Late in the session, investors will get the chance to react to the weekly inventories report from the American Petroleum Institute. It is expected to show a 1.3 million barrel build. A lower-than-expected build should be bullish for crude oil.

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