Oil Price Fundamental Weekly Forecast – Demand Concerns Outweighing Supply Worries

Over the long-run a direct U.S.-Iran conflict would likely lead to the shutdown of the Strait of Hormuz. This poses a higher risk of oil-supply disruption, which could lead to sharply higher prices. Therefore, we may continue to see attacks, but until there is a military response to the attacks, which would lead to actual supply disruptions, any gains are likely to be limited.
James Hyerczyk
Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed lower last week as demand concerns outweighed rising geopolitical tensions in the Middle East. The OPEC-led supply cuts remained in place, and the cartel and its allies are expected to approve an extension of this strategy at the end of the month. However, this news was not able to stop the selling pressure or shift the bearish investor sentiment.

Government trading data confirms this assessment with the Commodity Futures Trading Commission (CFTC) showing hedge fund managers continued to liquidate long positions at the fastest rate since the fourth quarter of 2018 due to rapidly increasing fears about a global economic slowdown.

Although there was a spike to the upside in reaction to the attacks on two tankers in the Straight of Oman, the trade this week was mostly dominated by worries over rising U.S. stockpiles and lower global demand.

For the week, August WTI crude oil settled into $52.77, down $1.39 or -2.57% and August Brent crude oil finished at $62.01, down $1.28 or -2.06%.

Bearish Factors Driving Prices Lower

The U.S. Energy Information Administration (EIA) on Wednesday reported crude stockpiles rose unexpectedly for a second week in a row, climbing 2.2 million barrels the week-ending June 7. Traders were looking for a drawdown of about 481,000 barrels. U.S. stockpiles now stand at 485.5 million barrels, the highest level since July 2017. This is 8% above the five-year average for this time of year.

Selling pressure was also fueled by a report from the U.S. Energy Information Administration (EIA) that showed a forecast for weaker 2019 world oil demand growth and U.S. crude production.

“Demand-side concerns became the most salient issue during the past month and contributed to volatility and price declines for risk assets such as commodities and equities,” EIA said in its Short-Term Energy Outlook.

The report went on to say the US/China trade conflict, potential US tariffs on Mexico and lower industrial activity have contributed to concerns “that economic growth could be lower than market participants’ expectations, which would cause oil demand growth to also be lower than expected.”

Sellers also responded to another report from experts, calling for lower future demand. The International Energy Agency (IEA) cut it demand growth forecast for 2019 by 100,000 barrels per day (bpd) to 1.2 million bpd, due to worsening prospects for world trade. However, this news was somewhat softened after the IEA said demand growth would climb to 1.4 million bpd for 2020.

On Thursday, OPEC cut its 2019 forecast for growth in global oil demand even lower than the IEA, to 1.14 million bpd.

China’s industrial output growth slowed to a more than 17-year low of 5% in May, well below expectations, in the latest sign of weakening demand in the world’s second-largest economy as the United States ramps up trade pressure. Fixed-asset investment also grew less than expected, official data showed on Friday, reinforcing expectations that Beijing will need to roll out more growth-boosting measures soon.

Bullish Event Stops Selling Pressure

Oil prices jumped on Thursday and held steady on Friday after two tanker ships carrying refined petroleum products were attacked in waters close to Iran. Since there was no major supply disruption or an escalation of military activity in the region, the short-covering rally fizzled and there was no follow-through to the upside on Friday. Nonetheless, the area remains a hotbed, which could keep investors on edge over the short-run.

Weekly Forecast

The attack on the two tankers was a serious event, but the real story is about the one-third of all global seaborne oil ships that travel through the Strait of Hormuz where the attacks occurred. Therefore, we may continue to see attacks, but until there is a military response to the attacks, which would lead to actual supply disruptions, any gains are likely to be limited.

Over the long-run a direct U.S.-Iran conflict would likely lead to the shutdown of the Strait of Hormuz. This poses a higher risk of oil-supply disruption, which could lead to sharply higher prices.

In the meantime, concerns about demand due to the slowing global economy are likely to prevent a serious rally. Furthermore, rising U.S. production is also likely to remain a bearish issue.

This week the Federal Reserve will reveal more about the state of the economy. The news could influence demand concerns. The Fed is likely to pass on a rate cut, but indicate one is likely in July due to concerns over a weakening economy. This could be bearish for prices unless it has already been priced into the market.

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