Oil Price Fundamental Weekly Forecast – Supply Issues Leave Little Room for Error

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed lower last week as investors took profits after lofty two-week gains while digesting the latest supply data.

Last week’s price action indicates the market appears to have absorbed the recent announcement that an OPEC-led group and Russia will raise output by about 1 million bpd. Most of the rally has been fueled by supply disruptions in Canada, Venezuela and Libya as well as the looming sanctions against Iran.

August WTI crude oil settled at $73.80, down $0.35 or -0.47% and September Brent crude oil closed at $77.11, down $2.33 or -2.93%.

Early in the week, Reuters reported that OPEC pumped 32.32 million bpd in June, up 320,000 bpd from May. The June total is the highest since January 2018.

U.S. Supply

On Thursday, the U.S. Energy Administration (EIA) announced that U.S. crude inventories had risen 1.2 million barrels in the week to June 29, to 417.88 million barrels. This news was generally thought of as bearish because traders had been pricing-in a 4.4 million barrel decline.

Additionally, gasoline stockpiles fell by 1.5 million barrels for the week, but distillate stockpiles were up by 100,000 barrels for the week, according to the EIA. Traders were looking for a decrease of 2.5 million barrels for gasoline, and 250,000 barrels for distillate stocks.

Forecast

China Could Raise Issues

Traders are paying attention to the escalating trade dispute between the United States and China although the current products caught in the tariff war are not energy-related. However, oil traders should continue to monitor the events because Beijing has threatened a 25 percent tariff on U.S. crude imports, although it has not specified an introduction date.

According to the latest estimates, American crude shipments to China are around 400,000 barrels per day (bpd), worth $1 billion a month at current prices.

An additional fact to consider:  Tariffs would make U.S. oil uncompetitive in China. This means China would begin buying more oil from the Middle East or West Africa.

How close is China to imposing the tariff on U.S. crude oil? On Thursday, an executive from China’s Dongming Petrochemical Group said he expected Beijing to soon impose the tariff on U.S. oil imports. He added that his refinery had cancelled U.S. crude imports and would switch to Middle East or West African supplies instead.

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Will the Shortages Worsen?

The debate at this time is how to compensate for disruptions in Venezuela, Libya and Iran. Venezuela is expected to lose another 400,000 bpd by year-end with production going to below 1 million bpd. Additionally, about 300,000 bpd of Libyan oil has been taken off the market.

The mystery remains the looming supply shortages due to U.S. sanctions against Iran. By some estimates, about 1.7 to 2 million bpd of crude and condensate would be cut out of markets once the sanctions are implemented.

Some argue that Saudi Arabia, Russia and the UAE, along with surging U.S. exports will cover the shortage. Others believe, the market may be undersupplied by 600,000 bpd over the next six months.

Saudi Arabia and Russia have agreed to increase output, but most of their 1 million bpd increase was expected to cover the short fall from Iran. At this time, there may not be enough spare capacity to cover the losses from Venezuela and Libya.

How much oil is supplied or taken off the market will determine whether WTI crude oil surges to $80 per barrel, or plunges to $62 – $63 per barrel.