Oil Price Fundamental Daily Forecast – Markets Likely to Remain Bid Due to Middle East Tensions

Before the market can really become stable, Saudi inventories are going to have to return to pre-attack levels, the damaged facilities are going to have to be repaired and working at full capacity and further threats will have to be prevented. Since the risk is to the downside, the markets are likely to be bid for several days.  
James Hyerczyk
Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging higher on Friday shortly after the regular session opening. The markets are trading in a tight range for a third session after posting a more than 10% gain on Monday and a 5% drop on Tuesday. Nonetheless, it’s still in a position to finish about 6% higher for the week on the back of elevated tensions in the Middle East.

At 12:26 GMT, November WTI crude oil futures are trading $58.73, up $0.54 or +0.93% and December Brent crude oil is at $63.82, up $0.49 or +0.77%.

The gains this week are the risk premium traders have placed on the market just in case the Saudis can’t repair their oil production facilities in a timely manner.

“Investors should probably assume that oil stabilizes for now in the $60-65 per barrel range, though the risk is to the upside,” said Christopher Wood from Jefferies.

“The central message from the attacks is the vulnerability of the Saudi infrastructure”.

Global Spare Capacity Concerns

After the attack on its facilities on September 14, Saudi Arabia’s production dropped by almost half. This fueled a “gap and go” rally early Monday. However, prices retreated and became rangebound after the Saudi oil minister pledged to restore lost production by the end of the month.

Nonetheless, there are concerns that the attacks on Saudi Arabia limited the country’s spare capacity. This is often referred to as “insurance” against any unplanned outage.

“Global available spare capacity is extremely low at present following the weekend attacks, leaving little room for additional outages, which tends to be price supportive,” UBS oil analyst Giovanni Staunovo said.

Earlier in the week, the Saudis said they could restore its lost production by the end of this month, and bring its output capacity back to 12 million barrels per day by the end of November. In the meantime, it said it had restored supplies to customers at levels prior to the attacks by drawing from its oil inventories.

“These plans suggest Saudi Arabia will have no spare capacity for at least the next two and half months and therefore no way to absorb any further shocks,” consultancy Energy Aspects said.

Daily Forecast

Friday’s price action suggests traders are building in a risk premium. This is because the Saudis are drawing on inventory, repairs are still taking place and the threat of further attacks on their oil production facilities have not been contained or eliminated.

Before the market can really become stable, Saudi inventories are going to have to return to pre-attack levels, the damaged facilities are going to have to be repaired and working at full capacity and further threats will have to be prevented. Since the risk is to the downside, the markets are likely to be bid for several days.

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