Oil Price Fundamental Weekly Forecast – Bullish Sentiment Over Low US Supplies Driving Price Action
U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished higher last week after flirting with a potentially bearish technical closing price reversal top on Friday. The rally drove the markets into multi-year highs with bullish sentiment about low supplies controlling the price action by dampening concerns over potential demand disruptions from a slight resurgence in COVID-19 cases.
WTI Outperforms Brent
The WTI futures contract posted strong gains against the Brent contract because the supply is tightening in the United States especially in the fuel markets. This was quite obvious in last week’s U.S. government inventories report.
Less-Demand from Power Generators
Traders also continued to monitor the switching to crude oil from natural gas and coal by power generators. Recently, crude oil prices were supported as power producers started using oil after natural gas and coal prices surged in Europe and Asia. However, prices were capped this week as Russia vowed to supply Europe with natural gas and following Beijing’s strongest intervention in years to boost supply and cool runaway coal prices amid a widespread power crunch. Nonetheless, this situation will continue to be eyed by traders throughout the winter.
Cushing Stocks Hit Three-Year Low
Perhaps the most bullish price driver last week was the news that U.S. crude and fuel inventories tightened further the week-ending October 15.
The major events were the news that supplies of gasoline hit a two-year low and inventories at the largest U.S. commercial storage hub dropped to a three-year low, according to the Energy Information Administration (EIA).
U.S. gasoline stocks fell by a more-than-expected 5.4 million barrels in the week to 217.7 million barrels, the lowest since November 2019, the EIA said. Distillate stockpiles, which include diesel and heating oil, fell by 3.9 million barrels, putting their stocks at their lowest levels since April 2020.
Meanwhile, crude stocks at the Cushing, Oklahoma, delivery hub fell by 2.3 million barrels to 31.2 million barrels. That’s the lowest level since October 2018, and points to tightness in the market that may take some time to alleviate.
The weekly outlook remains bullish for crude oil and the price action could become more volatile as prices rise so expect to experience heightened volatility.
Futures contracts are currently in backwardation, where later-dated contracts trade at a lower price than the current contract. That encourages companies to sell oil immediately rather than keep it in storage. This gives companies no economic incentive to keep excess inventories at Cushing, Oklahoma when they can sell it in the front month futures contract. Because of this, the drawdowns at Cushing are expected to continue which could put further upside pressure on prices.
Prices are expected to continue to rise until the refiners begin to ramp up activity. Meanwhile, the market could face some headwinds if power generator demand begins to decline or if there is another surge in COVID-19 cases.
A coronavirus surge will be the wildcard. If there is a major flare-up in cases, it wouldn’t change the longer-term trend because OPEC+ can always adjust its production levels. But it could lead to a sharp price decline as traders will be forced to rework their current demand numbers for late 2021 and early 2022.