Oil Price Fundamental Daily Forecast – Supported by Tight Supply Concerns, but Gains Likely Limited by Demand Worries

U.S. West Texas Intermediate and international-benchmark crude oil futures are trading higher early Monday. The U.S. futures contract is making a nice rebound after testing a key technical retracement area. The Brent contract did not complete an exact 50% to 61.8% retracement, nonetheless, buyers still came in to stop the price slide last week and continuing to press prices higher early Monday.

At 0859 GMT, October WTI crude oil futures are trading $68.49, up $0.71 or +1.03% and December Brent crude oil is at $77.51, up $1.04 or 1.38%.

According to traders, the catalysts for the rally are worries about tighter supply conditions once Washington’s sanctions against Iran’s crude oil exports kick in beginning in November, and stable U.S. production due to a flattening of the rig count last week.

Firstly, there are new signs that several major Iran customers like India, Japan and South Korea were already scaling back on purchases of Iran crude. These countries are complying with the U.S. mandate to stop all Iran oil purchases or face severe financial penalties.

Secondly, according to energy services firm Baker Hughes, U.S. energy companies cut two oil rigs last week, bringing the total count to 860. Furthermore, there is evidence that the U.S. rig count has been flattening for nearly four months, after mounting a huge recovery since 2016.

Forecast

After last week’s demand related sell-off, bullish traders are making their presence known early Monday. Additionally, the presence of “backwardation” pricing strongly suggests the market is tightening. This condition occurs when nearby futures contract are priced higher then deferred futures contracts. It is also gives traders an incentive to sell oil immediately instead of storing it.

Despite the early strength, the key question that remains is how demand develops amid the trade dispute between the United States and China, as well as general emerging market weakness. Last week, oil ministers from two major Middle Eastern producers expressed concerns over future demand from China.

So today, we’re looking for strength because of technical factors and concerns over tight supply, however, gains are likely to be limited by worries over future demand.

As far as the weather is concerned, there are two hurricanes in the Atlantic Ocean and one tropical storm. So far they are not a threat to any Gulf of Mexico energy operations so we’re not likely to see any risk premium priced into the market at this time. However, September is peak hurricane season in the region so conditions should be monitored daily.