Oil Price Fundamental Daily Forecast – Supported by Global Spare Capacity Worries

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading higher on Thursday after facing two days of selling pressure. Conditions have calmed considerably since Sunday’s gap-higher opening, however, there is still a risk premium in the market due to heightened tensions between the United States and Iran, and the lingering uncertainty over whether Saudi Arabia will be able to repair its damaged oil production facilities in a timely manner.

At 11:03 GMT, November WTI crude oil is trading $59.03, up $0.99 or +1.71% and December Brent crude oil is at $63.76, up $1.10 or +1.76%.

Global Spare Capacity Worries

Underpinning the market today are worries that the attacks on Saudi Arabia limited the country’s spare capacity. This is often referred to as “insurance” against any unplanned outage.

“Global available spare capacity is extremely low at present following the weekend attacks, leaving little room for additional outages, which tends to be price supportive,” UBS oil analyst Giovanni Staunovo said.

Earlier in the week, the Saudis said they could restore its lost production by the end of this month, and bring its output capacity back to 12 million barrels per day by the end of November. In the meantime, it said it had restored supplies to customers at levels prior to the attacks by drawing from its oil inventories.

“These plans suggest Saudi Arabia will have no spare capacity for at least the next two and half months and therefore no way to absorb any further shocks,” consultancy Energy Aspects said.

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On Wednesday after President Trump ordered the Treasury Department to “substantially increase” sanctions on Iran.

U.S. crude oil inventories increased 1.1 million barrels from the previous week, according to the Energy Information Administration (EIA). Traders were looking for a decrease of 2.1 million barrels.

Daily Forecast

The early price action suggests traders have started to build in a risk premium. This is because the Saudis are drawing on inventory, repairs are still taking place and the threat of further attacks on their oil production facilities have not been contained or eliminated.

Before the market can really become stable, Saudi inventories are going to have to return to pre-attack levels, the damaged facilities are going to have to be repaired and working at full capacity and further threats will have to be prevented.

That’s a lot to ask for so traders have to take protection against the worst case scenarios. In my opinion, this this likely to keep prices supported.