Oil Price Fundamental Weekly Forecast – Unrest in Iraq Could Provide Some Support

U.S. West Texas Intermediate and international-benchmark Brent crude oil ended the week on a high note, closing at its highest level for the month after China reported strong import data.

For the week, December WTI Crude Oil settled at $51.73, up $2.08 or +4.19% and January Brent Crude Oil finished at $56.95, up $1.59 or 2.87%.

Chinese oil imports hit 9 million barrels per day (bpd) in September, data showed. Imports averaged 8.5 million bpd between January and September.

Unrest in Iraq also supported prices. According to reports, Kurdish authorities have sent thousands more troops to the oil region of Kirkuk to confront “threats” from Iraq’s central government.

Earlier in the week, oil prices were pressured by a government report that showed U.S. fuel inventories rose despite efforts by OPEC to cut production.

According to the U.S. Energy Information Administration (EIA), U.S. crude inventories fell the week-ending October 6 as refining rates rose, while gasoline posted an unexpected hefty build.

Crude inventories dropped 2.7 million barrels, slightly more than analysts’ expectations for a decrease of 2 million barrels.

Gasoline stocks rose 2.5 million barrels, versus forecasts for a 480,000-barrel drop, spurring U.S. gasoline futures to extend losses and gasoline margins.

Distillate stockpiles, which include diesel and heating oil, fell by 1.5 million barrels, versus expectations for a 2.2 million-barrel drop, the EIA data showed.

Refinery crude runs rose by 229,000 barrels per day as utilization rates rose by 1.1 percentage points to 89.2 percent of total capacity, the EIA data showed.

The most bearish news for the week was attributed to an International Energy Administration (IEA) report which said demand for OPEC oil would be 32.5 million bpd next year – around 150,000 bpd lower than the group pumped last month.

This was bearish because it suggested that demand for OPEC crude next year would not be sufficient to absorb all the available supplies. It essentially means that OPEC must deepen its production cuts to finish its job of bringing oil stocks back to the five-year average.

Finally, the U.S. oil rig count fell for a second week in a row, extending a two-month drilling decline, even as crude prices rallied to over $50 per barrel.

According to energy services firm Baker Hughes, drillers cut five oil rigs in the week to October 13, bringing the total count up to 743, the lowest since early June.

Forecast

I continue to expect rangebound markets over the near-term. I’m not confident prices will breakout to the upside until OPEC and non-OPEC producers decide to extend and deepen the current production cuts.

The OPEC/Non-OPEC producers need to do something about output because they are not getting any help from U.S. producers. Prices will continue to be capped and support may even be threatened if the IEA forecasts are proven to be valid.

Not only is the IEA saying demand is expected to remain low, but the EIA also expects U.S. production to rise to 9.2 million barrels per day (bpd) in 2017 and a record 9.9 million bpd in 2018 from 8.9 million bpd in 2016.

The IEA also said this week it expects U.S. crude output to grow by 470,000 bpd this year and by 1.1 million bpd in 2018.

The unrest in Iraq could support prices and we may even see a spike to the upside if the situation escalates into military action, but gains may be limited by fear of increased production and low demand.