Oil Price Fundamental Weekly Forecast – Emerging Market Demand Concerns Becoming an Issue

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures settled higher last week, but if you watched the trading you’d probably say it was a labored rally because three out of the five days it closed lower. Nonetheless, the longer-term trend as determined by the weekly chart remains intact despite a subtle shift in momentum to the downside on the short-term daily chart.

For the week, November WTI crude oil settled at $74.34, up $1.09 or +1.49% and December Brent crude oil finished at $84.16, up $1.43 or +1.70%.

Leading the markets higher at the start of the week were speculators who continued to bet that the U.S. sanctions against Iran, which are expected to begin next month, would lead to a supply shortage.

In other news, hedge funds increased their bullish wagers on U.S. crude in the week to September 25, data from the U.S. Commodity Futures Trading Commission (CFTC) showed on Friday, increasing futures and options positions in New York and London by 3,728 contracts to 346,566 during the period.

Prices continued higher until Wednesday when a government report showed a bigger-than expected inventories build and news broke that Russia and Saudi Arabia had struck a private deal in September to raise crude output.

U.S. government data released on Wednesday showed a much more significant than forecast build in U.S. commercial crude inventories. Initially, this triggered a quick break, but this move was quickly gobbled up by aggressive hedge funds who increased their bullish bets for $100 crude oil. The buying was strong enough to trigger a breakout to the upside into four-year highs.

According to the U.S. Energy information Administration, U.S. crude oil stocks rose by nearly 8 million barrels last week to about 404 million barrels, the biggest increase since March 2017. Traders were looking for a build of 2.76 million barrels.

U.S. weekly Midwest refinery utilization rates dropped to 78.9 percent, their lowest since October 2015, according to the EIA data. At the same time, U.S. crude oil production remained at a record high of 11.1 million barrels per day.

Gasoline stockpiles fell by 500,000 barrels during the week ending September 28, while distillate stockpiles declined by 1.8 million barrels, according to the EIA. Traders had forecast supply declines of 672,000 barrels in gasoline and 1.83 million barrels in distillates.

Crude oil weakens somewhat at the end of the week with the emergence of the news that Saudi Arabia and Russia will boost output. The news rattled a few of the weaker longs whose primary focus was on the looming supply shortage.

Analysts expect the U.S. sanctions against Iran, which kick in on November 4, to take as much as 1.5 million barrels per day of supply out of markets. Saudi Arabia, Russia, and several allies were expected to increase production by 1.4 million barrels per day. This would leave a shortfall. Last week’s news means that the gap between the cuts and the production hikes would tighten this gap. This is potentially bearish news.

Furthermore, demand concerns are also becoming an issue. According to reports, high oil prices and weakening emerging market currencies are creating a toxic inflationary mix that could erode fuel demand and economic growth.

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Forecast

While the WTI and Brent markets could continue to be underpinned due to the uncertainty ahead of the start of the Iranian sanctions on November 4, we could start to see a sideways to lower trade until then due to the rapidly rising U.S. Dollar and a drop in demand from emerging market countries that can’t afford to buy dollar-denominated crude oil.

We’re going to maintain our upside bias but put more emphasis on buying price dips rather than strength. Due to the subtle change in the fundamentals, chasing the market higher will carry more risk than buying pullbacks into support.