Oil Price Fundamental Weekly Forecast – Traders Bracing for Mexico Response to US Tariffs

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures plunged last week amid an escalation of geopolitical events that have raised concerns over the strength of the U.S. economy and future demand. Crude oil also posted its biggest monthly loss since November as trade conflicts spread throughout the globe and U.S. crude production returned to record levels.

Last week, July WTI crude oil settled at $53.50, down $5.13 or -8.75% and August Brent crude oil finished at $61.99, down $5.48 or -8.84%.

Tariffs, and More Tariffs

The U.S. trade dispute with the world escalated last week when President Trump vowed to slap a 5% tariffs on all goods imported from Mexico. This news drove U.S. Treasury yields sharply lower and pressured demand for higher risk assets as investors increased bets on a global economic slowdown and perhaps a recession that could lead to a drop in demand for crude oil.

U.S. Production Hits Record

Crude oil prices were also pressured by a much smaller-than-expected decline in U.S. stockpiles. Additionally, the Energy Information Administration (EIA) reported that production returned to a record 12.3 million barrels per day.

On Thursday, the EIA said U.S. crude stocks fell by around 300,000 barrels during the week-ending May 24, to 476.49 million barrels. Traders were looking for a draw of about 900,000 barrels. Late Wednesday, the American Petroleum Institute (API) reported a 5.3 million barrel decline.

Saudi Production Also Rises

According to a Reuters survey, top oil exporter Saudi Arabia raised production in May, however, this was not enough to compensate for lower Iranian exports, caused by expanded sanctions by the U.S. against the rogue nation.

There’s Still a Sliver of Bullish News

Without question, crude oil prices have been supported since the first of the year by the OPEC-led production cuts and the U.S. sanctions on Venezuela and Iran.

Earlier in the week, OPEC and its allies indicated the production cuts would be extended in a meeting next month. Additionally, Russia will carefully considering extending its oil output reduction agreement with OPEC, Russian First Deputy Prime Minister Anton Siluanov told Reuters earlier in the week.

Furthermore, Kuwait’s oil minister Khaled al-Fadhel suggested OPEC is not in a rush to ease supply restraint ahead of the mid-year meeting. He said the market was expected to be in balance.

“We still have some more work to do. I believe the market is expected to be balanced during the 2^nd half of 2019, more towards the end of the year, Al Fadhel told Reuters.

Rig Count Surprise

According to energy services firm Baker Hughes, U.S. energy firms last week increased the number of oil rigs operating for the first time in four weeks. Nonetheless, the rig count declined for the sixth straight month as most drillers cut spending plans. Oil companies added three oil rigs.

Forecast

Last week’s events created a situation that could create a conflict between momentum traders and value seekers. Clearly, momentum is down as longs sell out positions at any cost. WTI value seekers may step in, however, to ease losses as the market currently tests a key area at $55.32 to $52.70. This is the last potential value area before the $44.20 main bottom. For Brent traders, the value area comes in at $62.93 to $60.32. If this area fails then the next target is the $51.90 main bottom.

Trump’s Mexican tariffs could hit U.S. refiners, adding to fuel costs. According to Reuters, Mexico sends 600,000 to 700,000 barrels of oil to the United States every day, mostly to refiners that process that crude into gasoline, diesel and other products.

Mexico buys more than 1 million barrels per day (bpd) of U.S. crude and fuel, more than any other country, and analysts are concerned that retaliatory tariffs from Mexico could disrupt that trade.

There is a bright spot, however. Mexico’s president on Saturday hinted his country cold tighten migration controls to defuse U.S. President Donald Trump’s threat to impose tariffs on Mexican goods.

In a news conference in the Gulf of Mexico port of Veracruz, President Andres Manuel Lopez Obrador said Mexico could be ready to step up measures to contain migration in order to reach a deal with the United States.

Crude oil could bounce higher this week if Mexico takes steps to contain migration and Trump postpones the start of the tariffs on good faith.