Oil Price Fundamental Weekly Forecast – Headline News Bearish, but Tight Short-Term Supply Could Attract Buyers

U.S. West Texas Intermediate and international-benchmark Brent crude oil finished higher last, driven by aggressive speculators who appear willing to chase the market higher even at multi-year highs.

August WTI crude oil settled at $74.15, up $5.57 or +8.12%. September Brent crude oil closed at $79.44, up $4.12 or +5.47%.

Fundamentally, international Brent crude oil remains firm because looming sanctions by the White House against Iran are expected to lead to a sharp drop in supplies from the OPEC-member.

WTI crude oil is being supported by supply disruptions in Canada. North America’s oil markets have tightened significantly this week as an outage of Canada’s Syncrude has locked in over 300,000 bpd of production. The outage is expected to last at least through July, according to operator Suncot.

Besides the looming U.S. sanctions against Iran, which is fueling the rally in Brent futures, and the outage in Canada, which is supporting WTI crude, both markets are also benefitting from supply issues in Venezuela and Libya.

On the other side of the equation, demand has been strong, reaching records throughout the year. OPEC said on June 22 that it will raise output in order to meet demand and replace crude from unplanned disruptions. However, concerns have been raised this week that a trade war may cause a slowdown in global economic growth. This could lead to lower demand.

So the debate amongst traders at this time is whether there will be a surplus or a deficit in crude oil supply later this year when OPEC meets to determine its plan for next year. Last week’s price action suggests that investors are betting on a deficit.

The Fundamentals

Despite rising U.S. output, U.S. commercial crude oil inventories dropped by almost 10 million barrels in the week-ending June 22 to 416.64 million barrels, according to the EIA. That’s below the 5-year average level of around 425 million barrels.

The 9.9 million barrel draw was well-above the 2.4 million barrel estimate. It was due to high exports of almost 3 million bpd, coupled with domestic refinery activity hitting a utilization rate of 97.5, the highest in more than a decade.

Forecast

The direction in the crude oil market this week will be primarily determined by trader reaction to a possible increase in production by Saudi Arabia. Since most headlines dealing with increased supply tend to be bearish, we expect to see a volatile reaction to the downside early in the week. I think it’s safe to say that we will see heightened volatility.

On Saturday, President Trump said in a tweet, “Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference … Prices to high! He has agreed!”

According to reports, Saudi King Salman and Trump emphasized the need to preserve oil market stability and the efforts of oil-producing countries to compensate for any potential shortage, in a phone call reported by Saudi state media on Saturday. However, the statement did not mention any intention by Saudi Arabia to raise production to 2 million barrels per day.

Traders and analysts agree that the introduction of politics into a game usually driven by the economics of supply and demand should add volatility to the markets. However, although talk of increased supply tends to drive prices lower initially, buyers may jump in on any sizeable price dip because over the near-term, traders are still expecting a tightly supplied market. This further supports the case for increased volatility and a two-sided trade.