Oil Price Fundamental Daily Forecast – Saudi Export Cuts Underpinning Prices but Stock Market Weakness Capping Gains

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Thursday after failing to following through to the upside, following yesterday’s rally. Helping to put a lid on prices today is a sharply lower stock market. U.S. equity markets are being pressured by a steep drop in shares of Apple after the company lowered first quarter guidance.

At 1051 GM%, February WTI crude oil is trading $46.26, down $0.29 or -0.60% and March Brent crude oil is at $54.91, down $0.04 or -0.07%.

On Wednesday, crude oil traded higher, bolstered by signs of tighter supplies from Saudi Arabia that offset output in the United States and weak economic data.

A short-covering rally was fueled yesterday after traders pointed to signs that Saudi Arabia is beginning to make good on vows to cut output after a swift fourth-quarter collapse in oil prices. According to data from Bloomberg, Saudi exports in December fell by about half a million barrels per day to stand at 7.253 million bpd. Additionally, figures from ClipperData have shown that loadings of Saudi crude on ships bound for the United States have been falling in recent months.

Forecast

The conflicting fundamentals could trigger a volatile trade over the near-term as the bulls and the bears continue to work through issues that could have both a positive and negative effect on prices.

On the positive side, the OPEC-led production cuts began on January 1. This will reduce output by 1.2 million barrels per day. Secondly, we have signs that Saudi Arabia will hold true to its vow to cut exports to the United States. The Saudis have used this price-boosting strategy in the past to shrink U.S. stockpiles.

According to John Kilduff, founding partner at energy hedge fund Again Capital, the “Saudis are trying to engineer a fall, if not plunge, in U.S. crude oil inventories to give the appearance of global tightness.”

On the negative side, we worries about an economic slowdown and a volatile stock market. Furthermore, there are major concerns over rising output from Russia and the United States. On Wednesday, Russia reported that it pumped 11.16 million bpd in 2018, marking a post-Soviet-era record. Earlier in the week, the U.S. Energy Information Administration said U.S. production hit another all-time high in October at 11.54 million bpd.

The production data is stale which means U.S. output may have risen, however, due to the expected production cuts, Russian output is expected to decline.

The biggest problem that the market has to overcome is fears of a global economic slowdown and a drop in demand. However, these concerns aren’t expected to dissipate until the U.S. and China work out their trade differences.

I think the foundation is there for a rally, but not until we start to see the effects of the OPEC-led production cuts and the Saudi export reductions on global supply.