Oil Price Fundamental Weekly Forecast -Despite Mounting Demand Concerns, Market Vulnerable to Supply Disruption

U.S. West Texas Intermediate and international benchmark Brent crude oil futures went on a wild ride last week before closing lower. At one point last week, the U.S. futures contract was down about 2.40 percent before clawing back nearly half of that loss.

October WTI crude oil settled the week at $66.94, down $0.41 or -0.61% and October Brent futures finished at $72.81, down $0.40 or -0.55%.

China Retaliation Fuels Mid-Week Sell-off

Most of the week’s loss was attributed to a steep one-day sell-off on Wednesday. The move was fueled by the escalating trade dispute between the United States and China. Traders fear that additional tariffs from China will lead to lower demand. Furthermore, investors were reacting to key domestic data from China, which presented early signs of slowing demand.

Uncertainty over Iranian Sanctions Limits Losses

Helping to limit losses are worries that renewed U.S. sanctions against Iran will tighten supplies.

Bullish investors are holding out hope that the Iranian sanctions have not been fully priced into Brent, leaving room for a significant run-up in prices after November 1 when the full effect of the sanctions begin to take place.

Between now and then, the U.S. will use tactics to try to convince all nations to comply with its sanctions. With several major buyers of Iranian crude oil still not complying with the U.S. orders, there is still uncertainty as to how much oil will be removed from the market. Currently, analysts expect the drop-off in Iranian crude exports to range between 500,000 barrels per day (bpd) and 1.3 million bpd.

IEA Issues Potentially Bullish Warning

Besides the Iranian sanctions, which affect supply and the potential for lower demand from additional Chinese sanctions, traders also reacted to the latest monthly report from the International Energy Agency (IEA).

The IEA report said Friday that the U.S. plan to impose targeted crude sanctions against Iran could significantly impact global supply and exhaust the world’s spare oil capacity cushion.

“As oil sanctions against Iran effect, perhaps in combination with production problems elsewhere, maintaining global supply might be very challenging and would come at the expense of maintaining an adequate spare capacity cushion,” the Paris-based organization said Friday.

“Thus, the market outlook could be far less calm at that point than it is today,” the IEA added.

The IEA also issued comments on trade tensions.

“Risks introduced by trade tensions have further increased, threatening to significantly reduce growth in some exporting countries,” the IEA said Friday.

“The threat of trade disruptions could recede as fast as they are mounting, however, it is difficult at this stage to make adjustments to our base case assumptions for the economy and oil demand,” the group added.

Key Fundamental Events

To recap this week’s events, on Tuesday, the U.S. renewed sanctions against Iran that are expected to eventually remove about 1 million barrels per day of crude oil from the market. This threatens supply. On Wednesday, China said it will impose tariffs of 25 percent on a further $16 billion in U.S. imports. Among the goods affected are crude oil and other petroleum products. This affects future demand.

In other news, the U.S. Energy Information Administration reported that crude inventories fell 1.4 million barrels in the week-ended August 3, less than half the 3.3 million-barrel draw analysts had expected. Gasoline stocks rose by 2.9 million barrels, compared with an estimate for a drop of 1.7 million-barrel drop.

Other News

U.S. energy companies added the most oil rigs since last May during the week-ending August 10. The move wasn’t a complete surprise as drillers followed through on plans to spend more on exploration and production in anticipation of higher crude prices in 2018 than recent years.

Drillers added 10 oil rigs in the week to August 10, bringing the total count to 869, the highest level since March 2015, General Electric’s Baker Hughes energy services firm said in its closely followed report on Friday.

Forecast

The battle this week will be between those bullish traders who believe that U.S. sanctions against Iran will continue to tighten supply and those bearish traders who are banking on global trade disputes to slow economic growth and hurt demand for energy.

The rising U.S. Dollar could also be supportive for bearish investors because it tends to lead to lower foreign demand for dollar-denominated crude oil. Crude demand could also decline if gasoline demand slows going into the fall and refiners shut down for maintenance, pushing more crude into storage.

Supply is the wildcard because we don’t know how many more countries will comply with U.S. requests to boycott Iranian crude oil. And we may not know until the full impact of the sanctions on Iran kick in on November 1.

Supply could tighten further if more countries jump on board to support the U.S. We’re going to look for increased volatility in the form of a two-sided trade as the bulls and bears jockey for position ahead of the sanctions. We’re also going to side with the International Energy Agency who said on Friday that the oil market could see more turbulence later this year.

“The recent cooling down of the market, with short-term supply tensions easing, currently lower prices, and lower demand growth might not last,” the IEA said in a monthly report.

Despite posting its sixth straight weekly loss for its worst losing streak since August 2015, all it is going to take is one major supply disruption to fuel a breakout to the upside.