Oil Price Fundamental Daily Forecast – Pressured by API Supply Jump, Underpinned by Geopolitical Risks

U.S. West Texas Intermediate and international-benchmark crude oil futures are trading lower on Wednesday shortly before the U.S. opening and the release of the weekly government inventories report. The markets have been trading sideways-to-lower for nearly three weeks, underpinned by the OPEC-led production cuts and U.S. sanctions against Iran and Venezuela.

Keeping a lid on prices are worries about increased production from Saudi Arabia and some of its allies to meet a possible shortfall caused by expanded sanctions against Iran, and concerns about a global economic slowdown that could lead to lower demand. Worries over Russia leaving the OPEC-led agreement could also be raising issues for traders. This issue is likely to be addressed when OPEC meets at the end of June to renew or end the production cuts.

At 09:05 GMT, July WTI crude oil is trading $61.37, down $0.59 or -0.97% and July Brent crude oil is at $70.79, down $0.45 or -0.63%.

Geopolitical Risks Providing Support

Additional support from crude oil this week is being provided by speculative buying tied to a report from Saudi Arabia that said armed drones struck two of its oil pumping stations just two days after the sabotage of four oil tankers in the Strait of Hormuz near the United Arab Emirates.

Unexpected Stockpile Increase Weighs on Prices

Late Tuesday, the American Petroleum Institute (API) reported an unexpected rise in U.S. crude oil stockpiles. Gasoline and distillate inventories also increased.

Crude oil inventories rose by 8.6 million barrels during the week-ending May 10 to 477.8 million. Analysts were looking for a drawdown of 800,000 barrels. Gasoline inventories rose 567,000 barrels versus a forecast for a 274,000 barrel draw. Distillates rose by 2.2 million barrels for the week, while inventories at Cushing, Oklahoma, the U.S. futures hub, rose by 2.1 million barrels.

OPEC Sees Future Demand …

On Tuesday, OPEC said that world demand for oil would be higher than expected this year as supply growth from rivals including U.S. shale producers slows. That points to a tighter market if the exporter group continues to refrain from raising output.

But China Demand Could Be an Issue

Early Wednesday, China reported that its industrial output slowed more than expected to 5.4% in April from a 4-1/2 year high in March. This may mean that Beijing will have to roll out more stimulus measures if the trade war with the United States continues to escalate and linger.

Daily Forecast

The sideways-to-lower short-term trend could continue today following the release of the U.S. Energy Information Administration (EIA) at 14:30 GMT. Estimates call for little change following last week’s 4 million barrel draw down.

A strong build could weigh on oil prices, but geopolitical risks could keep prices afloat. Traders are reporting that the U.S. military said it was braced for “possibly imminent threats to U.S. forces in Iraq” from Iran-backed forces.

Citing “very real” threat reporting on Iran, but withholding details of those specific threats, Secretary of State Mike Pompeo emphasized during an interview with CNBC on Sunday that all options – military and otherwise – were on the table in case Iran “makes a bad decision.”

British foreign minister Jeremy Hunt told reporters on Monday:  “We are very worried about the risk of a conflict happening by accident with an escalation that is unintended.”