Oil Price Fundamental Weekly Forecast – OPEC+ Gradual Output Increase, Demand Recovery Issues Equal Headwinds
U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished higher last week in a mostly choppy trade. The market was poised to finish lower for the week until OPEC and its allies made an announcement that may have shook a few of the weaker shorts out of their positions.
Earlier in the week, the catalysts weighing on prices were the restarting of traffic on the Suez Canal after a huge ship blocking the landmark was freed earlier in the week, mixed U.S. inventories data, a stronger U.S. Dollar, fear of increasing supply from Iran and concern over a weakening demand recovery due to a global coronavirus uptick.
Traffic Starts Moving on the Suez Canal
Ships were moving through the Suez Canal again last Tuesday after tugs refloated the giant Ever Given container carrier, which had been blocking a narrow section of the passage for almost a week, causing a huge build-up of vessels around the waterway.
US Crude Inventories Mixed
The API reported a build in crude oil inventories of 3.910 million barrels for the week ending March 26. Analysts were looking for a small build of 107,000 barrels for the week. The EIA reported that crude inventories fell by 876,000 barrels in the week to March 26. This was slightly below the consensus estimate of a 1.3 million barrel draw.
The difference in the API and EIA crude inventory numbers suggests the market is still trying to recover from the deep freeze in Texas in February.
OPEC+ Agrees to Gradually Boost Crude Oil Output
OPEC and its allies announced that they have decided to gradually increase oil production by some 2 million barrels per day from May to July, moving cautiously in pace with the recovery of the global economy from the COVID-19 pandemic.
According to reports, the group known as OPEC+ is restoring production that was slashed last year to support prices as demand sagged during the worst of the pandemic recession, which sapped demand for fuel. The group will add back 350,000 barrels per day in May, 350,000 in June, and 400,000 in July.
Traders reacted by driving prices higher on Thursday, suggesting they had been pricing in a more aggressive rise in output for May. Despite the rally, the news isn’t especially bullish so gains could be limited over the near-term.
Looking ahead, the market could face headwinds.
China is ignoring U.S. and United Nations sanctions and importing higher amounts of Iranian oil, according to traders and analysts. China may receive as much as 1 million barrels a day this month in imports from Iran passed off as crude from other origins.
In Europe, rising numbers in a third wave of infections are alarming authorities, with France’s Finance Minister Bruno Le Maire saying “all options are on the table” to protect the public.
The fundamental news appears to be bearish on paper despite Thursday’s rally, which may have been fueled by thin, pre-holiday trading volume. I can’t see how increasing supply even gradually while the world experiences another surge in COVID-19 cases could lead to another new high in the market.
Furthermore, Iran supply is increasing despite sanctions and OPEC even lowered its expected demand for the rest of the year.
In my opinion, traders are going to start selling rallies in an effort to drive prices through recent support levels later in the month.