Oil Price Fundamental Weekly Forecast – U.S. May Be Pondering Sanctions Against Saudi Arabia

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished lower last week as investors shifted their focus away from supply concerns due to the upcoming sanctions against Iran and onto rising U.S. inventories. Concerns over U.S.-China relations also put pressure on prices. Both U.S. and Brent crude finished lower for a second straight week. Traders were also cautious over the developments in Saudi Arabia over the death of a prominent journalist.

Last week, December WTI crude oil futures settled at $69.28, down $1.90 or -2.67%. January Brent crude oil finished below $80 at $79.26, down $0.81 or -1.02%.

U.S. Energy Information Administration (EIA) Report

According to the U.S. Energy Information Administration, U.S. crude stocks rose 6.5 million barrels during the week-ending October 12, the fourth straight weekly build. Traders were looking for a 1.6 million barrel build.

Inventories rose sharply even as U.S. crude production fell 300,000 bpd to 10.9 million bpd last week. Analysts said the drop was attributed to the effects of offshore facilities closing temporarily for Hurricane Michael.

Gasoline stockpiles fell by 2 million barrels last week, while distillate stockpiles declined by 800,000 barrels, according to the EIA. Forecasts called for a drop of 1.52 million barrels in gasoline and 1.5 million barrels for distillates.

China’s Economic Issues Rise to Forefront

The focus for investors late in the week shifted to U.S.-China relations and the on-going Sino-U.S. trade war.

Early Friday, domestic government data showed refinery throughput in China, the world’s second-largest oil importer, rose to a record high of 12.49 million barrels per day (bpd) in September as some independent plants restarted operations after prolonged shutdowns over summer to shore up inventories.

However, the report also showed that refinery consumption may rise through the fourth quarter as several state-owned Chinese refiners return to service after maintenance.

On the bearish demand side, China also reported on Friday its weakest economic growth since 2009 in the third quarter, with gross domestic product expanding by only 6.5 percent, coming in below estimates.

The weak GDP data raised concerns that the country’s trade war with the United States is beginning to have an impact on growth, which may limit China’s oil demand.

Possible U.S. Sanctions Against Saudi Arabia

Oil traders are also continuing to monitor developments over the death of a prominent Saudi journalist. The outcome of an investigation could lead to U.S. sanctions against Saudi Arabia, but Saudi officials have also promised retaliation if sanctions are pursued. This may mean a cut in production, which should be bullish for prices. Some traders are speculating Saudi Arabia could cut as much as 500,000 barrels per day of crude production in response to any U.S. sanctions.

Additionally, the West is trying to put financial pressure on the Saudi’s amid growing controversy over Khashoggi by pulling out of its major investment conference. On Wednesday, the managing direction of the International Monetary Fund and the heads of two major French banks said they would not attend the conference. On Thursday, Treasury Secretary Steven Mnuchin announced that he will not participate in the high-profile conference.

Forecast

As we rapidly approach the start of the sanctions against Iran on November 4, investors will continue to monitor exports from Iran and the number of nations likely to side with the U.S. in limiting the amount of oil exported from the rogue nation.

Full cooperation with the boycott against Iran is likely to continue to underpin prices. However, gains could be limited by rising U.S. production and the promise by Saudi Arabia and Russia to continue to increase production in an effort to offset the losses from Iran.

In the meantime, the Saudi’s will continue to try to deflect the negative news over Khashoggi by talking up its role in preventing a worldwide oil shortage following the start of the sanctions against Iran on November 4. In an attempt to prevent a speculative rally and keep prices under control, Saudi Arabia assured OPEC that it is “committed, capable and willing” to ensure there will be no shortage in the oil market, OPEC’s secretary-general said.

The direction of the WTI futures contract this week is likely to be determined by trader reaction to $70.10 to $68.54. Look for an upside bias to develop on a sustained move over $70.10 and for a downside bias to develop on a sustained move under $68.54.

Brent could strengthen on a sustained move over $78.73, and weaken further on a sustained move under $76.95.