Oil Price Fundamental Daily Forecast – Demand Concerns Helping to Limit Gains

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading a little lower early Thursday amid concerns that the current rally may be overdone given the current supply and demand situation.

At 0635 GMT, August WTI crude oil is trading $72.42, down $0.34 or -0.47% and September Brent crude oil is at $77.22, down $0.24 or -0.31%.

Despite the perceived overall bullishness, traders should note there is a divergence in the market between WTI and Brent crude oil. On Wednesday, WTI crude surged to a three-and-a-half year high, while the nearest Brent futures contract rallied to $77.22, falling well short of its May top at $80.05.

The price action makes sense, however, because OPEC is increasing Brent output, while Wednesday’s U.S. government report showed a huge draw in U.S. WTI inventories.

U.S. Energy Information Administration Report

Despite rising U.S. output, U.S. commercial crude oil inventories dropped by almost 10 million barrels in the week-ending June 22 to 416.64 million barrels, according to the EIA. That’s below the 5-year average level of around 425 million barrels.

The 9.9 million barrel draw was well-above the 2.4 million barrel estimate. It was due to high exports of almost 3 million bpd, coupled with domestic refinery activity hitting a utilization rate of 97.5, the highest in more than a decade.

Forecast

Although prices are likely to be underpinned by supply disruptions in Libya and Canada, we could be looking at a short-term top if investors decide to shift their focus to the demand side of the equation.

Oil demand has been on a record pace all year, but conditions may be changing amid escalating trade disputes between the United States and its key trading partners, China and the European Union.

Some traders are saying that the macroeconomic view is overwhelmingly bearish. This is because credit conditions are worsening, which could have a negative impact on the demand for crude oil in the next 4-6 weeks. This could be because rising interest rates are making it harder to borrow enough money to sustain current cash flow needs.

So although the price action the last week has been impressive, it may have all been driven by technical momentum and headlines. These are short-term catalysts. Intermediate and longer-term investors are looking at rising production with OPEC and Russia producing at near maximum output and the U.S. nearing another record.

If supply continues to rise and demand should suddenly shift lower, we could be looking at a flood of oil in the market and this would be bearish for prices. At this time, it seems there is not a lot of room for error in the supply/demand equation.