Oil Price Fundamental Daily Forecast – Weaker as Investors Price in Potential End-of-Year Surplus

U.S. West Texas Intermediate and international benchmark Brent crude oil are trading lower early Monday with the latter feeling the brunt of the selling pressure. Additionally, both markets have failed to follow-through to the upside after Friday’s strong surge, suggesting the rally was fueled by short-covering rather than aggressive buying.

At 0605 GMT, August WTI crude oil is trading $68.33, down $0.25 or -0.36% and September Brent crude oil is at $74.07, down $1.25 or -1.66%.

Early in the session, Brent crude oil was down as much as 2 percent after investors digested the expected output increase announced by OPEC at its headquarters in Vienna on Friday.

On Friday, prices surged after the deal was announced because the estimated output increase came in below expectations. Going into the meeting, investors were pricing in a 1 million barrel increase, however, the actual increase may come in at about 600,000.

Traders were saying that the reduced increase combined with increasing demand would put the market in a deficit later this year. However, Britain’s Barclays bank said OPEC’s and Russia’s commitments would take “the market from a -0.2 million bpd deficit in H2 2018 to a 0.2 million bpd surplus”.

Furthermore, it looks like Russia and Saudi Arabia are likely to make up the expected short-fall created by economic turmoil in Venezuela and the Iranian sanctions. Other OPEC and non-OPEC producers may not hike production at all. It’s been reported that the Saudis and Russian have been operating at below the 1.8 million barrels per day (bpd) targeted cuts, so they have room to expand production.

Forecast

The price action early Monday indicates that crude oil traders may be trying to find some middle ground on the charts. This is because in essence, the OPEC agreement was a compromise.

Increasing output too much would have crushed the crude oil market. This would have harmed the OPEC nations. On the other hand, a reduced increase in production would have driven prices to levels that could have led to slower global economic growth and lower demand.

We’re likely to see a two-sided trade over the near-term until traders can determine a balance point on the chart. After that, investors will let the forces of supply and demand, but mostly demand, determine where prices will end up at the end of the year when the current OPEC-led production cut deal ends.