Oil Price Fundamental Daily Forecast – Supply Situation Indicates Little Room for Error

U.S West Texas Intermediate and international-benchmark Brent crude oil futures are trading higher this week, showing a limited response to President Trump’s tweet last Saturday, stating that Saudi Arabia had agreed to boost output by 2,000,000 barrels per day (bpd). I don’t think anyone believed the figure in the first place, but it did bring attention to increasing Saudi production.

Saudi Arabia later acknowledged a call had taken place between Trump and Saudi Arabia’s King Salman, but did not mention any production targets.

Most of the talk this week has been about supply with a few smatterings of comments on demand.

This week’s price action indicates the market appears to have absorbed the recent announcement that an OPEC-led group and Russia will raise output by about 1 million bpd. Most of the rally has been fueled by supply disruptions in Canada, Venezuela and Libya as well as the looming sanctions against Iran.

Earlier in the week, Reuters reported that OPEC pumped 32.32 million bpd in June, up 320,000 bpd from May. The June total is the highest since January 2018.

King Salman said Saudi Arabia is ready to deploy the nation’s spare capacity to add more oil to the market. And the UAE’s Abu Dhabi National Oil Co. (ADNOC) said on Tuesday it could increase production by several hundred thousand barrels per day if needed.

The size of the OPEC production increase and the verbal commitments from Saudi Arabia and the UAE is further evidence that hitting a 2M bpd increase will be a challenge. It may be a longer-term factor, but short-term, crude oil bulls are more interested in the supply disruptions.

The debate at this time is how to compensate for disruptions in Libya, Venezuela and Iran. Some argue that Saudi Arabia, Russia and the UAE, along with surging U.S. exports will cover the shortage. Others believe, the market may be undersupplied by 600,000 bpd over the next six months.

Some are saying that the United States’ recent declaration of zero tolerance for Iranian exports has caused bullish investors to reassess the impact of U.S. sanctions on Iran’s exports, believing that shipments may fall by 1.1 million bpd by year end. Previously, the market had priced in a loss of about 700,000 bpd through 2019.

How much oil is supplied or taken off the market will determine whether WTI crude oil surges to $80 per barrel, or plunges to $62 – $63 per barrel.