Oil Price Fundamental Daily Forecast – Saudi Arabia May Raise Output to Offset Lost Iranian Exports

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading sharply higher on Monday. Both markets are up over 2 percent, hitting their highest levels since early November, after a report said the United States is preparing to announce a further tightening on Iranian oil exports.

The news is bullish because when combined with the OPEC-led production cuts and U.S. sanctions against Venezuela, further tightens global supplies.

At 12:00 GMT, June WTI crude oil is trading $65.47, up $1.40 or +2.19% and June Brent crude oil is at $73.75, up $1.78 or +2.46%.

WTI hit an intraday high of $65.99 and Brent reached $74.29 before profit-takers and short-sellers came in to drive prices off their highs. Traders said the timing of the story came as a surprise with many looking for the news to be released during the first week in May. Furthermore, they are saying that the story brings a lot more uncertainty into the market in terms of global supplies, which is likely to lead to increased volatility.

To recap the events leading up to today’s situation, in November, the United States reimposed sanctions on exports of Iranian crude oil after President Trump unilaterally pulled out of a 2015 nuclear accord between Iran and six world powers.

In doing so, however, the Trump administration granted waivers to Iran’s eight main buyers. That allowed them to continue making limited purchases for six months. Some analysts blame the issuance of the waivers for the steep drop in crude oil prices between October and January.

Later today, U.S. Secretary of State Mike Pompeo is due to make an announcement that eliminates the waivers for China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece.

Daily Forecast

Today’s steep rally is a reaction to the possibility of a further squeeze in global supplies. The next move will come after Pompeo’s official announcement. This move could cause further upside action by aggressive speculative buyers. However, there is always the possibility that he kills the short-covering rally.

Additionally, we expect to see the return of heightened volatility because of expected pushback from China and India. Of particular interest will be China’s response since the world’s second largest economy is currently in the middle of major trade negotiations with the United States.

Furthermore, traders are waiting for the official response from Saudi Arabia, the de facto leader of the OPEC-led supply cuts. According to CNBC, “A source familiar with Saudi thinking told Reuters on Monday Saudi Arabia is willing to compensate for any potential loss of crude supply but the kingdom will assess the impact on the market before raising its output.

Essentially, crude oil gains could be limited or prices could retreat if Saudi Arabia decides to increase production to offset the lost Iranian crude oil.