Oil Price Fundamental Daily Forecast – Underpinned by Worries Over Potential Supply Shortage

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading a little better early Friday. Volatility may be down, but the market continues to be underpinned by worries about a supply shortage. Traders are mostly concerned about the impact of the Iranian sanctions on global supply and whether Saudi Arabia and Russia can produce enough to offset the shortfall.

At 0747 GMT, November WTI crude oil is trading $72.33, up $0.21 or +0.29% and December Brent crude oil is at $81.54, up $0.16 or +0.20%.

To recap the narrative this week, traders have been primarily focused on the impact of the Iran sanctions all week. The concerns are how much oil will be removed from the global supply and whether OPEC and its allies can make up the difference. The numbers are still being debated and traders may not know close to the exact amount until shortly after the sanctions begin on November 4.

Shortly after the U.S. announced the sanctions on Iran, the market estimated a reduction of between 500,000 and 2 million barrels per day of crude oil. Shortly after that, Saudi Arabia and Russia announced they would increase output by about 1.4 million barrels per day. This is currently where we stand with speculative buyers being driven by the notion that the increased production will fall short of the lost output.

Last week-end, OPEC and its allies discussed increasing production by another 500,000 barrels per day, but this idea was rejected because Saudi Arabia is worried it might need to limit output next year to balance global supply and demand as the United States pumps more crude.

Forecast

The fundamentals are bullish, but the rally has slowed since the U.S. said there would be plenty of supply to offset any shortfalls. This seems to have stopped the speculative buying although the market is still being underpinned. If the U.S. doesn’t reveal its plan to offset the shortfall soon then the rally is likely to resume. Perhaps the market thinks the U.S. is working on a secret deal with Saudi Arabia or Russia to raise production a notch. All I know is the rally has stalled and the move coincided with the U.S. comments.

Besides the U.S. comments, gains are also being limited by increasing U.S. production and stable output from Libya. Nonetheless, the market is fragile and there is not much room for error. Essentially, all it is going to take is an unexpected supply disruption to launch another surge to the upside.