Oil Price Fundamental Daily Forecast – Rangebound Trade Reflects Uncertain Supply/Demand Situation

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging higher on Tuesday after touching their lowest levels since November 5 the previous session. The price action also suggests that buyers came in to defend the November 4 bottom at $77.23.

Looking at the short-term picture, the markets are trading at the dead center of their October 25 to November 24 trading ranges. This suggests investor indecision and impending volatility.

Two catalysts are creating the rangebound trade. Underpinning prices are worries over tight inventories, while capping gains are fresh concerns over demand.

At 09:34 GMT, January WTI crude oil is trading $80.04, up $0.29 or +0.36% and January Brent crude oil is at $82.42, up $0.37 or +0.45%.

Tightening or Loosening Supply – It Depends Who You Ask

If you ask money and risk managers, crude oil prices are tightening, but if you ask the International Energy Agency (IEA) looser conditions may be coming. This could explain the three weeks of rangebound trading.

“At these oil prices, supply is going to grow but it might take six months and inventories have come down so low. We don’t have a safety margin,” said Tony Nunan, a Tokyo-based senior risk manager at Mitsubishi Corp.

“We have very low inventory levels and if we have a very cold winter and OPEC is still sluggish at increasing supplies that could push oil prices up.”

Global oil markets remain very tight and heavily backwardated as demand returns to pre-pandemic levels, Trafigura’s Chief Executive Officer Jeremy Weir said.

“We are seeing a very, very tight oil market but it’s not artificially tight because of what OPEC is doing. Demand is there,” Weir said at the FT Commodities Asia Summit.

An oil market rally may ease off as prices that hit a three-year high last month help push up global production, particularly in the United States, the International Energy Agency (IEA) said on Tuesday.

“The world oil market remains tight by all measures, but a reprieve from the price rally could be on the horizon … due to rising oil supplies,” the Paris-based agency said in its monthly oil report.

“Current prices provide a strong incentive to boost (U.S.) activity even as operators stick to capital discipline pledges,” it said.

My takeaway from these comments is the crude oil market is not too hot, or not too cold. This screams rangebound trade, or it opens the door to demand taking the lead.

Short-Term Outlook

Worries about demand destruction due to the COVID-19 pandemic have resurfaced in Europe and parts of China. Some are saying another wave will hit the U.S. after the Thanksgiving and Christmas holidays.

If supply remains tight then a little demand destruction is likely to have little effect on crude oil prices except cap gains.

If supply continues to rise when demand destruction hits then we could have an oversupplied market very quickly. Especially if OPEC+ continues to increase output at a rate of 400,000 barrels per day.

At 21:30 GMT, the American Petroleum Institute (API) will release its weekly inventories report. It is expected to show crude oil supply rose by about 1 million barrels.