Oil Price Fundamental Daily Forecast – Sideways-to-Lower as Traders Grapple with Supply/ Demand Uncertainty

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower at the mid session on Friday, putting them in a position to post a lower close for the week. Long traders appear to be booking profits and there may be some new short-selling as investors prepare for a possible double-hit from demand destruction due to the surge in COVID-19 cases and the upcoming tapering of OPEC+ production cuts, which could lead to increased supply.

At 15:46 GMT, September WTI crude oil is trading $40.54, down $0.39 or -0.95% and September Brent crude oil is at $42.93, down $0.44 or -1.01%.

Supply Could Come Back

Traders are worried that supply could come roaring back after OPEC and its allies agreed to trim their record supply cuts of 9.7 million barrels per day (bpd) by 2 million bpd, starting in August.

“The actual rise would be closer to 1 million bpd, as Iraq and other countries, which produced more than their quota from May to July, make extra cuts in August and September,” said Vivek Dhar, commodity analyst at Commonwealth Bank of Australia.

Demand Becomes the Wildcard

The United States reported at least 75,000 new COVID-19 cases on Thursday, a daily record. Spain and Australia reported their steepest daily jumps in more than two months, while cases continued to soar in India and Brazil.

So far the U.S. government has indicated that it will not shut down the economy, but it may not have to as many are expected to curtail their shopping and driving activity to protect themselves from COVID-19. This could weigh on gasoline and distillate demand.

Short-Term Outlook

At best, prices could become rangebound. The start of OPEC+ tapering was not a surprise. It had been telegraphed at the meeting in June. Furthermore, it is a gradual tapering, which means the markets will be able to adjust to any changes in supply rather quickly.

However, there will be an impact on supply so it’s going to be hard to build a case for higher prices if supply rises. So let’s just conclude that the elements are there for a cap on prices.

The real question is how will the uncertainty about the impact of new lockdowns on fuel demand affect prices? Obviously, when you’re talking about the possibility of lower demand combined with higher supply, the short-term outlook can’t be extremely bullish.

Higher supply and lower demand at best mean prices will have a lid on them. Although there will be uncertainty, there will still be demand. Therefore, prices could drift lower, but support will be there to stop the market from any significant price slide.