Oil Price Fundamental Daily Forecast – “Fragile” Supply Situation Makes Prices Vulnerable to Upside Spike

U.S. West Texas Intermediate and international-benchmark Brent crude oil is trading higher early Wednesday on the back of a private industry report showing declines in U.S. crude inventories and as looming sanctions against Iran threaten to tighten supply. Additionally, top producer Russia raised concerns about the vulnerability of the global crude market.

At 0843 GMT, October WTI crude oil is trading $69.74, up $0.49 or +0.71%. December Brent is at $78.68, up $0.10 or +0.13%. We’re rolling to the November WTI futures contract on Thursday. The open interest shifted to the November utures contract, but the volume is still in the October contract.

Crude oil prices jumped late Tuesday after the American Petroleum Institute (API) reported a major draw of 8.636 million barrels of U.S. crude oil inventories for the week-ending September 7, compared with expectations of a 2.7 million barrel draw.

The API also reported a build in gasoline inventories for the week-ending September 7 in the amount of 2.122 million barrels. Traders were looking for a flat number.

Distillate inventories were also up during the recording period by 5.82 million barrels, compared with a forecast build of 2.3 million barrels. Inventories at the Cushing, Oklahoma, futures hub decreased this week by 1.165 million barrels.

Forecast

Momentum is up because of tightening supply issues. The Brent contract has gained back almost all of last week’s decline and now we have the Russians warning about the impact of U.S. sanctions against Iran.

Russian energy minister Alexander Novak on Wednesday said, “This is huge uncertainty on the market – how the countries, which buy almost 2 million barrels per day of Iranian oil will act. The situation should be closely watched, the right decisions should be taken.”

Novak said geopolitical risk and supply disruptions shared the blame for the global oil markets “fragile” condition.

Novak also said, “It is related to the fact that not all countries have managed to restore their market and production.” Traders suggested he was referring to outages and falling production in Venezuela and Mexico.

However, he did add that “Russia has potential to raise production by 300,000 barrels per day (bpd) mid-term, in addition to the level of October 2016.”

Besides the API report, traders are also responding to the potential impact of Hurricane Florence, which is expected to make landfall in a day or two. It is already causing fuel shortages as millions of households and businesses flee the area.

Given the “fragile” situation, it doesn’t look like it is going to take much to spike prices higher. Later today at 1430 GMT, the U.S. Energy Information Administration is expected to report a 1.3 million barrel draw down for the week-ending September 7. A bigger-than-expected draw could drive prices sharply higher.