Oil Price Fundamental Weekly Forecast – EU Decision on Iran Sanctions Could Set Tone This Week

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed higher for a third consecutive week. The markets were bolstered by strong demand, ongoing production cuts from the OPEC-led deal to stabilize prices and looming U.S. sanctions against major crude exporter Iran which could lead to supply disruptions. Gains were likely limited by worries over increasing U.S. production.

July West Texas Intermediate crude oil settled at $71.37, up $0.69 or +0.98% and July Brent crude oil finished the week at $78.51, up $1.39 or +1.80%.

Early in the week, The IEA also said global demand would average 99.2 million bpd in 2018. Additionally, the IEA said although supplies currently only stand at 98 million bpd due to supply cuts led by OPEC, the IEA said that “strong non-OPEC growth…will grow by 1.87 million bpd in 2018.”

At mid-week, the U.S. Energy Information Administration reported that U.S. crude inventories dropped by 1.4 million barrels in the week to May 11, to 432.34 million barrels.

Not all the news was bullish, however, the International Energy Agency (IEA) said on Wednesday that it had lowered its global oil demand growth forecast for 2018 from 1.5 million barrels per day (bpd) to 1.4 million bpd.

Additionally, traders are also saying that United States production is ready to overtake Russia production. As a result of surging production, U.S. crude is increasingly appearing on global markets as exports. U.S. production now sits at a record 10.72 million bpd.

Traders are also saying that United States production is ready to overtake Russia production. Additionally, as a result of surging production, U.S. crude is increasingly appearing on global markets as exports.

Finally, the crude forward curve is in firm backwardation, a structure that suggests a tight market as prices for immediate delivery are higher than those for later dispatch. For example, front-month Brent prices are now almost $2.60 per barrel more expensive than those for delivery in December.

This price action indicates speculators are betting on strong demand as well as looming disruptions due to renewed U.S. sanctions against Iran and falling output in Venezuela. Professionals are scrambling to buy all the oil they can get because of fears that U.S. shale producers will make up any short-falls in supply over the longer-term.

Forecast

WTI and Brent crude traders will be looking for direction early next week because the U.S. oil rig count held steady last week after rising for six weeks in a row even as crude prices soared to multi-year highs, prompting drillers to extract record amounts of oil, especially from shale.

The total oil rig count held at 844 in the week to May 18, General Electric Co.’s Baker Hughes energy services firm said in its closely followed report on Friday.

The fact that Brent crude oil weakened more than WTI crude oil on Friday could be a sign of profit-taking related to a cooling of geopolitical tensions. This essentially removed the fear bid from the global benchmark.

The price action this week is likely to be determined by whether the European Union decides to stick with the Iranian nuclear accord. Although the EU said it will continue to honor the deal, some energy companies have already started to pull back from Iran. Last Wednesday, French oil giant Total SA said it would withdraw from an agreement to help develop a gas field off Iran if it wasn’t granted a waiver by the U.S.

Furthermore, Reuters reported on Friday that the European Commission is proposing that EU governments make direct money transfers to Iran’s central bank as a means to avoid U.S. penalties.

Traders will also get a chance to react to the elections in Venezuela over the week-end.

Essentially, I believe that oil prices will be supported this week if the EU decides to follow the lead of the U.S. and pull out of Iran. If the EU agrees to continue to adhere to the agreement then crude oil prices could fall as this would diminish fears over the size of the potential supply disruption.