Oil Price Fundamental Daily Forecast – Traders Still Seeking Clarity of Supply Situation As Sanctions Begin

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower early Monday but holding Friday’s low. The inside move suggests investor indecision and impending volatility.

Today marks the start of the U.S. sanctions against Iran. Although the U.S. is looking for 100% cooperation from other nations in boycotting Iranian crude oil, it did offer waivers that will allow some countries to continue to import Iranian crude, at least temporarily. South Korea has been named as one such country receiving an exemption.

At 0757 GMT, December WTI Crude Oil futures are trading $62.79, down $0.35 or -0.55% and January Brent Crude Oil is at $72.62, down $0.21 or -0.29%.

Other so-called “jurisdictions” include Taiwan, China, India, Turkey, Italy, the United Arab Emirates and Japan.

Herein lies one of the problems fueling the bear market. During the rally, buyers had priced in full-cooperation, or zero tolerance with the sanctions. The market drove up prices because traders anticipated a supply shortage. This also led the U.S., Saudi Arabia and Russia to ramp up production to make up the shortfall.

Now we have a situation where these three countries are supplying one-third of the world’s oil demand while the U.S. is allowing some countries to continue to buy Iranian oil. This has created a surplus of oil and traders are reacting accordingly by selling crude oil.

The other problem is demand is expected to fall at a time when production is rising. This will add further to the surplus.

In other news, traders cut their bullish bets on crude futures to a one-year low by the end of October, the fifth consecutive cut during a month when prices posted their largest drop in over two years, Commodity Futures Trading Commission data showed on Friday.

Forecast

Prices are likely to continue to remain under pressure until WTI and Brent traders find value. Both contracts are likely to find psychological support first. Real support is not likely to form until traders get a clearer picture of how the Iranian sanctions and the exemptions are affecting supply. However, this could be weeks.

The first psychological support for WTI is $60.00. Brent’s psychological support is $70.00.

The other way that the oversupply situation can be relieved is with production cuts by the U.S., Saudis and Russians. The first sign that U.S. producers are planning to cut production is if they go through a series of reductions in the number of producing rigs. Once the Saudis and Russians get the data on the true shortage from the sanctions then they are also likely to reduce production if need be.