Oil Price Fundamental Weekly Forecast – Weak Dollar Could Be Supportive

Baker Hughes reported that the number of active U.S. rigs drilling for oil declined by 6 to 770 this week, marking a fifth straight week in a row that most independent producers cut spending even though the major producers were still pushing ahead with investments in new drilling.
James Hyerczyk
WTI and Brent Crude Oil

U.S. West Texas Intermediate and International-benchmark Brent crude oil futures finished lower last week, but for the most part, the markets proved to be resilient to a slew of events that could have led to even steeper weekly losses.

The markets traded mostly steady early in the week as traders seemed to be relieved the Fed provided “insurance” against a melt-down in the economy, then fell apart after President Trump announced more tariffs on China that could negatively affect demand. However, on Friday, traders seemed comforted by the strong possibility of another rate cut in September by the Fed to perhaps counter the effects of the fresh tariffs.

Last week, September WTI crude oil settled at $55.66, down $0.54 or -0.96% and October Brent crude oil finished at $61.89, down $1.48 or -2.39%.

The Fundamentals

Earlier in the week, the U.S. Energy Information Administration (EIA) showed another larger-than-expected drawdown. However, this was somewhat offset by a slight increase in U.S. crude production during the week-ending July 26. Nonetheless, prices still rose on the news.

According to the EIA, U.S. crude oil production averaged 12.2 million barrels per day (bpd) last week, up by 900,000 bpd from the previous week and up by about 1.3 million bpd year on year.

In other news pointing to lower demand, U.S. manufacturing activity slipped last month, dropping to a near three-year low, and construction spending fell in June as investment in private construction projects tumbled to its lowest level in 1-1/2 years.

ISM Manufacturing PMI came in at 51.2, down from 51.7 and below the 52.0 forecast. Construction Spending fell 1.3%. Traders were looking for a 0.5% increase. The previous month was revised higher to 0.5%.

Long-Term News

Russia and Iran are planning a joint naval exercise scheduled within the next year, commander of Iran’s Navy, Rear Admiral Hossein Khanzadi announced Monday, according to state media. According to a report, the exercise will take place in March 2020 in the Indian Ocean and may extend to the Strait of Hormuz.

“A coordination meeting will be held between the two sides in this regard,” he said while on a three day visit to Russia. “When we speak of the Indian Ocean, perhaps the most important part of which is the northern region where it’s linked to the Sea of Oman, the Strait of Hormuz and also the Persian Gulf,” Khanzadi said from Saint Petersburg.

This news is not expected to have an impact on prices over the near-term but it could be something to watch early next year especially after the recent escalation of tensions in the region. In July, the U.S. Navy claimed it shot down an Iranian drone, and Iran seized a British-flagged oil tanker.

Other News

On Friday, Baker Hughes reported that the number of active U.S. rigs drilling for oil declined by 6 to 770 this week, marking a fifth straight week in a row that most independent producers cut spending even though the major producers were still pushing ahead with investments in new drilling.

The total active U.S. rig count, meanwhile, also fell by 4 to 942.

Weekly Forecast

We’re looking for the possibility of two-sided trading until the volatility slows down in the financial markets.

On the upside, foreign demand for dollar-denominated crude oil could increase if the U.S. Dollar continues to weaken.

On the downside, the selling could resume if China hits the U.S. with aggressive countermeasures to the new tariffs. This will tell traders whether China is digging in for the long haul, or softening a little to U.S. pressure.

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