Oil Price Fundamental Daily Forecast – Gains Could Be Limited Until Hedge Funds Start Buying Again

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower early Thursday. Prices are being pressured by expectations that OPEC members will step up production in the fact of potential supply disruptions from Venezuela and Iran.

At 0740 GMT, July WTI crude oil futures are trading $71.56, down $0.26 or -0.36% and July Brent crude oil is at $79.41, down $0.39 or -0.49%.

An unexpected build in U.S. crude oil inventories is also weighing on prices, driving the spread between Brent crude and U.S. West Texas Intermediate (WTI) close to its widest in three years.

Supply concerns due to the economic turmoil in Venezuela and the looming sanctions against Iran had pushed both Brent and WTI to multi-year highs. However, talk that OPEC may decide to increase oil output to make up for the reduced supply from Iran and Venezuela as well as possible pressure from Washington over the rally in oil prices has been putting pressure on oil prices this week.

In other news, on Wednesday, the U.S. Energy Information Administration (EIA) said commercial crude inventories rose by 5.8 million barrels in the week to May 18. This surprised traders who were looking for a draw of 1.6 million barrels.

Additionally, U.S. crude oil exports dropped by more than 800.000 barrels a day last week to about 1.75 million barrels a day. Meanwhile, crude imports were up by 558,000 barrels and refiners produced less distillate fuel, which includes diesel and heating oil.

Gasoline stockpile levels also surprised the market by jumping 1.9 million barrels a day, while distillate inventories fell slightly less than expected.

Forecast

Although crude oil is in a position to close lower for the week, it’s probably a little too early to call for a change in trend due to the building uncertainty in the market. The news is more likely to fuel a sideways to lower trade, but not necessarily a major change in trend.

Firstly, we don’t know if OPEC is going to raise output. It’s only speculative at this time. We aren’t likely to know the final outcome until Russia or Saudi Arabia provide their input.

Secondly, we don’t know if or when the U.S. will impose sanctions on Venezuela, given its current economic situation.

Finally, we know the U.S. is planning to reimpose sanctions on Iran, but there is still uncertainty over the response from the European Union, Russia and China.

One key indicator to watch is hedge fund and commodity fund activity. They have cut their holdings of crude futures and options by more than 10 percent in the last seven weeks to the lowest level this year. The markets are not likely to rally much from current price levels until the professional money managers start buying again.