Oil Price Fundamental Weekly Forecast – Anticipated Shortfall Expected to Continue to Drive Prices Higher

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished higher last week with the latter outperforming by nearly two-percent. All week, the markets were underpinned by worries about a supply shortage. Traders were mostly concerned about the impact of the Iranian sanctions on global supply and whether Saudi Arabia and Russia can produce enough crude oil to offset the expected shortfall.

For the week, November WTI crude oil futures settled at $73.25, up $2.47 or +3.49% and December Brent crude oil closed at $82.73, up $4.49 or +5.43%.

Key Issue

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. A little 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.

At its meeting in Algeria 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.

Factors That Could Limit Gains

Although the price action last week was primarily to the upside, some news did limit the rally. According to the U.S. Energy Information Administration, domestic crude supplies rose by 1.9 million barrels for the week-ended September 21. The EIA had reported declines in each of the previous five weeks. Traders were looking for a draw of about 2.2 million barrels.

Gasoline stockpiles rose 1.5 million barrels for the week, while distillate stockpiles fell by 2.2 million barrels, according to the EIA. Traders expected an increase of 256,200 in gasoline and 667,000 barrels in distillates.

The rally in WTI crude was also slowed by comments from the White House. President Trump reiterated calls on OPEC to pump more oil and stop raising prices. Additionally, Washington’s special envoy for Iran, Brian Hook, told a news conference at the United Nations General Assembly, “We will ensure prior to the reimposition of our sanctions that we have a well-supplied oil market.

Forecast

At its peak in May, Iran exported 2.71 million bpd, nearly 3 percent of daily global crude consumption. If this is taken off the market and the Saudi’s and Russian produce 1.4 million bpd as forecast then there will be a shortfall. ANZ said in a note on Friday that major suppliers were unlikely to offset losses due to the sanctions estimated at 1.5 bpd.

This is the narrative that is expected to continue to drive prices higher this week.

Additionally, drillers cut three oil rigs in the week to September 28, General Electric’s Baker Hughes energy services said on Friday. Furthermore, new drilling has stalled in the third quarter with the fewest additions in a quarter since 2017 due to pipeline constraints in the nation’s largest oilfield.

The news at the start of the week is bullish and prices are expected to continue to rise. This is, of course, unless Washington’s special envoy for Iran, Brian Hook, finds the oil he needs to keep the market well-supplied.