Oil Price Fundamental Daily Forecast – Short-Term Focus Shifts to U.S. Rig Count Report

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading firm early Friday in limited action.

At 0823 GMT, July WTI crude oil is trading $71.73, up $0.17 or +0.22% and July Brent crude oil is at $79.68, up 40.38 or +0.48%.

The market is being supported by strong demand, ongoing production cuts from the OPEC-led deal to stabilize prices and looming U.S. sanctions against major crude exporter Iran which could lead to supply disruptions. Gains are being limited by worries over increasing U.S. production.

 Forecast

Backwardation has returned. The crude forward curve is in firm backwardation, a structure that suggests a tight market as prices for immediate delivery are higher than those for later dispatch. For example, front-month Brent prices are now almost $2.60 per barrel more expensive than those for delivery in December.

This price action indicates speculators are betting on strong demand as well as looming disruptions due to renewed U.S. sanctions against Iran and falling output in Venezuela. Professionals are scrambling to buy all the oil they can get because of fears that U.S. shale producers will make up any short-falls in supply over the longer-term.

The trend is your friend at this point so unless there is a surprise announcement from the U.S. about lifting sanctions against Iran, of if other countries come out strong against the sanctions, prices should continue to grind higher.

Technical factors could also stop the rally because prices are at or nearing what technicians call “overbought” levels. I tend to look at hedge fund activity to tell me if a market is “overbought”. If hedge fund and other commodity fund managers continue to be willing to buy strength in the market then prices should continue to rise.

We may see a few downswings in the market, but it’s going to take 3 to 5 days to change the trend to down. However, the weekly and monthly charts indicate this is a strong uptrend so any weakness on the daily chart is likely to be bought up fairly quickly.

Trading conditions are relatively calm early in the session, but volatility could return with the release of the weekly oil rig count. I suspect this report could show a huge jump in the number or working rigs. This could put short-term pressure on oil prices.