Oil Price Fundamental Daily Forecast – Prices Slide into Bear Market Territory

The downside momentum is building and the only way to stop prices from falling further is to cut production.
James Hyerczyk
Crude Oil
Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Friday, pressured by rising supply and worries about lower demand. The markets are trading 20 percent off their October highs, putting them in bear market territory according to technical analysts. WTI is in a position to finish the week about 4.1 percent lower, while Brent is down about 2.9 percent for the week.

At 0940 GMT, December WTI crude oil is trading $60.31, down $0.36 or -0.59% and January Brent crude oil is at $70.40, down $0.25 or -0.35%.

The main downward pressure is coming from rising supply. U.S. production continues to rise due to improvements in shale drilling, and Saudi Arabia and Russia have raised production to meet the short-fall caused by the sanctions against Iran. However, no one was expecting the U.S. to issue eight exemptions from the sanctions. This added extra supply to the market.

Adding further to the downside pressure is expectations of lower demand. The U.S. Dollar continues to be supported by rising U.S. interest rates. This is making the dollar a more attractive asset to the detriment of several emerging market currencies. This is helping to make dollar-denominated crude oil too expensive to foreigners, leading to the drop in demand.

Forecast

The downside momentum is building and the only way to stop prices from falling further is to cut production. We saw earlier in the week what the mere mention of Saudi Arabia and Russia discussing possible production cuts in 2019 can do to prices. So unless the drive toward lower production starts to gain traction, prices are likely to continue to slide.

There is not much the market can do about supply. A weaker U.S. Dollar would definitely help, but that isn’t likely to happen unless inflation cools and the Fed stops raising rates. Lower crude prices should impact inflation. Maybe prices will drop enough for the Fed to sit up and take notice.

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