Oil Price Fundamental Weekly Forecast -Expecting Heightened Volatility Due to Impact of OPEC Decision

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed higher last week after spiking nearly 5 percent higher on Friday after OPEC agreed to a modest increase in production to cover output losses from Venezuela and Iraq at a time when rising global demand put the market dangerously close to a short-fall. The move in WTI futures marked its biggest one-day jump since November 2016.

August WTI Crude Oil settled at $68.58, up $3.73 or +5.75% and September Brent Crude Oil finished the week at $75.32, up $2.24 or +3.07%.

The deal was reached fairly quickly on Friday after some news services speculated that negotiations could continue into Saturday. The quick decision came about after Saudi Arabia persuaded arch-rival Iran to cooperate in efforts to reduce the crude oil and avoid a supply shortage.

In other news, according to the EIA, U.S. crude inventories fell by 5.9 million barrels in the week-ending June 15, traders were looking for a draw of 2.1 million barrels.

Gasoline stockpiles rose by 3.3 million barrels, while inventories of distillate fuel, jumped by 2.7 million barrels, the EIA reported. Implied demand for both fuel types weakened by more than 550,000 barrels per day.

Additionally, in a sign of strong demand, U.S. refineries processed a seasonal record of 17.7 million barrels per day (bpd) of crude oil last week, according to the EIA.

Weekly U.S. production remained at a record 10.9 million bpd.

Also supporting prices was a drop in Libyan supplies due to the collapse of an estimated 400,000-barrel storage tank. This news helped widen the spread between Brent crude oil and WTI crude oil.

Finally, the total oil rig count dipped to 862 in the week to June 22, General Electric’s Baker Hughes energy services firm said in its closely followed report on Friday.

Forecast

We going to continue to see heightened volatility next week as investors continue to digest Friday’s OPEC decision. We suspect that the move was primarily driven by short-covering which means we could see a pullback into support because many investors don’t like to chase market higher, especially since they could’ve bought crude oil about 5 percent lower earlier in the week.

Uncertainty over the size of the production increase could also continue to fuel a volatile reaction. Traders were looking for a 1 million barrel increase at this time next week, now the figure may be as low at 600,000. Furthermore, OPEC is not expected to actually release a hard target, but many traders expect the real figure to remain well-below the 1.8 million barrels already being removed from the market.

Worries over increased demand and a possible shortage later in the year could also underpin prices. Saudi Energy Minister Khalid al-Falih said Friday, the world could face a supply deficit of 1.8 million bpd in the second half of 2018 and that it was OPEC’s responsibility to alleviate consumers’ concerns. Essentially implying that OPEC would do its best to keep the world supplied with oil in order to prevent a slowdown in economic growth.

Traders are also concerned that the escalating dispute between the United States and China could hit U.S. crude oil exports to Beijing. This could leave markets prone to supply shortages and price spikes in case of large, unforeseen disruptions.