Oil Price Fundamental Daily Forecast – Ripe for Correction Due to Short-Term Supply Concerns

U.S. West Texas Intermediate and international-benchmark Brent crude oil are under pressure early Wednesday, a day after hitting new multi-year highs. The markets are being weighed down by a private report showing ample U.S. supplies. Underpinning the markets are the ongoing production cuts by an OPEC-led coalition and the looming U.S. sanctions against Iran that could lead to future supply disruptions.

At 0730 GMT, July WTI crude oil futures are trading $71.07, down $0.29 or -0.42% and July Brent crude oil is at $78.06, down $0.37 or -0.47%.

According to the American Petroleum Institute, U.S. crude oil inventories rose 4.854 million barrels to 435.6 million barrels during the week-ending May 11. Analysts were looking for a small draw of 763,000 barrels.

The API also reported a draw in gasoline inventories for the wee-ending May 11 in the amount of 3.369 million barrels, a bigger draw than the 1.421-million-barrel draw that analysts had expected.

Distillate inventories saw a small draw last week of 768,000 barrels. Analysts had forecast a larger decline of 2.155 million barrels.

Inventories at the Cushing, Oklahoma site rose by 62,000 barrels.

U.S. crude oil production for the week-ending May 4, the most recent data available, increased to 10.703 million barrels per day, according to the EIA.

Forecast

Traders are saying there are signs in physical crude markets that may give pause to financial investors. Spot crude oil cargo prices are at their steepest discounts to futures prices in years as sellers are struggling to find buyers for West African, Russian and Kazakh cargoes, while pipeline bottlenecks trap supply in west Texas and Canada.

The bottleneck in North America likely contributed to a 4.9 million barrel rise in U.S. crude oil inventories, to 435.6 million barrels, that the API reported on Tuesday.

Global crude oil supplies remain tight and that is supportive longer-term especially with the sanctions against Iran expected to disrupt supply. However, over the short-run, the market may be ripe for a correction until supply starts moving again.

I’m expecting a near-term pullback because the recent buying spree has put the market too far ahead of the fundamentals.

Today’s U.S. Energy Information Administration’s weekly inventories report is expected to show a 1.1 million barrel draw down. However, this may change, given the API data. A surprise inventory build in crude could send prices sharply lower by the end of the session.

As for WTI crude, taking out $70.24 will change the main trend to down on the daily chart and could trigger a string of sell stops.