Oil Price Fundamental Weekly Forecast – Focus Remains on Timing of Trump’s Decision on Iran Sanctions

Crude oil futures finished mixed last week with U.S. West Texas Intermediate crude oil closing lower and international-benchmark Brent ending higher. The price divergence could raise concerns with some traders, but can be explained easily so I don’t think it is a major issue.

June WTI crude oil settled at $68.10, down $0.30 or -0.44% and June Brent crude oil settled at $74.64, up $0.58 or +0.78%.

While WTI headed lower for the week, Brent crude oil closed higher for a third week in row. The possibility of supply disruptions in Iran underpinned Brent, while WTI was capped by rising U.S. production. This is what is drove the widening discount between Brent and WTI. Additionally, U.S. crude’s discount to Brent hit its widest since December 28 at $6.74 a barrel.

Consistent Narrative

The underlying narrative remains the same. Prices are being supported by continued adherence to the OPEC-led production cuts, increased demand from Asia, possible supply disruptions in Iran and turmoil in Venezuela.

Gains are being limited by rising U.S. production as shale drillers try to take advantage of higher prices by ramping up activity.

Weekly Recap

The price action was choppy this week with both WTI and Brent posting two-sided moves. Crude oil traded higher on Monday and Tuesday with Brent trading through last week’s high. However, a bigger than expected jump in U.S. inventories sent crude oil futures lower. The selling continued on Wednesday on the initial reaction to the U.S. government inventories report, but the markets finished higher.

U.S. West Texas Intermediate and international-benchmark Brent crude oil posted a reversal to the upside late Wednesday to finish higher for the session following the release of the weekly EIA inventories report. Early in the trading day, prices were driven lower after the report showed an unexpected increase in U.S. crude oil and gasoline inventories.

According to the U.S. Energy Information Administration (EIA), crude inventories rose 2.2 million barrels in the week to April 20, compared with expectations for a decrease of 1.6 million barrels. Gasoline stocks grew by 840,000 barrels, versus forecasts for a 625,000-barrel drop.

Net U.S. crude imports fell last week by 43,000 barrels per day as exports rose nearly 600,000 bpd to a record 2.3 million bpd, according to the EIA data.

Additionally, combined exports of crude and petroleum products hit a weekly record at 8.3 million bpd, of which more than 6 million bpd was from products like gasoline and diesel fuel. Exports of distillate inventories have been strong of late, draining inventories on the East Coast, a traditional parking spot for distillates like jet fuel.

Refinery runs fell by 328,000 bpd and utilization rates fell by 1.6 percentage points to 90.8 percent of total capacity, EIA data showed.

Overall U.S. crude production continued to grow, rising last week to 10.59 million bpd.

Pressuring the market was the rise in gasoline inventories which jumped due to an extraordinary high level of imports. However, tempering the news a little was the record exports of crude oil and distillate fuel last week.

Forecast

Another rise in the U.S. rig count could put pressure on the markets early in the week. According to General Electric’s Baker Hughes energy services firm, U.S. drillers added five oil rigs the week-ending April 27, bringing the total count to 825, the highest level since March 2015.

The key factor that should keep volatility at elevated levels until at least May 12 is whether the Trump Administration will restore sanctions on Iran that were lifted during the Obama Administration after an agreement over its disputed nuclear program.

The fundamentals are bullish so the hedge funds can take their time in deciding how they want to play the next move. The next move will likely be determined by whether the news is strong enough to force the hedge funds to buy strength, or encourage them to buy weakness.

The key event this week could be a surprise early announcement about the Iran sanctions. This is what is likely to drive the volatility. Both futures contracts will rise if the U.S. reimposes the sanctions, but the spread between Brent and WTI should widen on the news.