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Oil Price Fundamental Weekly Forecast – Supply Tight, but Trade Concerns Capping Prices

The current price action suggests a major move is coming, but it’s not likely to happen until there is major breaking news regarding U.S. –China trade relations. At this point it appears traders aren’t going to make a move until they know definitively if trade deal negotiations are on or off, and how China is going to retaliate against the increased U.S. tariffs.
James Hyerczyk
WTI and Brent Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished a little lower last week, but most of the price action was sideways as investors tried to sort out the ever-changing U.S.-China trade story.

Continuing to underpin prices were the OPEC-led production cuts and the U.S. sanctions against Venezuela and Iran. This news provided steady support throughout the week because these events are helping to keep global supply tight.

Last week, July WTI crude oil futures settled at $61.80, down $0.24 or -0.39% and July Brent crude oil futures finished at $70.62, down $0.23 or -0.33%.

Giving prices a further boost last week was an unexpected drop in U.S. crude inventories. U.S. crude oil stocks fell by 4 million barrels in the week-ended May 3, according to the Energy Information Administration (EIA). Traders were looking for a 1.1 million barrel build.

The EIA also reported an estimated fall of 600,000 barrels in gasoline inventories after a 900.000-barrel increase two weeks ago. Production in the week to May 3 averaged 10.1 million bpd, versus 9.9 million bpd in the previous week.

The EIA report also showed an inventory draw of 200,000 barrels in distillate fuel, which compared with a decline of 1.3 million barrels a week earlier. Distillate fuel production last week averaged 5.1 million bpd, largely unchanged on the prior week.

Other News

Earlier in the week, President Trump said the U.S. will deploy four B-52 bombers to the Middle East in response to what the Trump administration said are threats of a possible attack by Iran on American troops in the region. This helped generate some speculative buying in crude oil

Baker Hughes on Friday reported that the number of active U.S. rigs drilling for oil fell by 2 to 805 this week. That followed an increase of 2 oil rigs the previous week. The total active U.S. rig count, meanwhile, also fell by 2 to 988, according to Baker Hughes.

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Weekly Forecast

Tight global supplies are likely to continue to underpin WTI and Brent crude oil prices. The sanctions against Iran and Venezuela aren’t going to go away over the near-term. The OPEC-led supply cuts are likely to remain intact until at least late June when the cartel and its allies will meet to discuss the fate of the program.

The wildcard this week will be U.S.-China relations. I do believe a trade deal will eventually get done but in the meantime, moves will be made that could have an adverse effect on crude oil prices.

On Friday, the U.S. implemented new tariffs on China. The world’s second largest economy is now expected to retaliate. They could place a tariff on U.S. crude oil. This would hurt U.S. exports that could drive up domestic supply, while putting pressure on prices.

The main concern weighing on crude oil is whether an escalating trade dispute will lead to a U.S. recession, which would hurt U.S. demand for crude oil.

The current price action suggests a major move is coming, but it’s not likely to happen until there is major breaking news regarding U.S. –China trade relations. At this point it appears traders aren’t going to make a move until they know definitively if trade deal negotiations are on or off, and how China is going to retaliate against the increased U.S. tariffs.

Finally, technical factors are also controlling the direction of prices, namely the 200-day moving average, which is providing support for both the WTI and Brent futures contract.

For July WTI crude oil, the 200-day moving average support is at $60.79, and July Brent crude oil’s 200-day moving average support is at $68.96.

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