Oil Price Fundamental Weekly Forecast – Will Another Price Plunge Cause Supply Deal to Unravel?

U.S. West Texas Intermediate and internationally-favored Brent crude oil finished sharply lower last week for the fifth consecutive week.

August WTI crude oil settled at $43.01, down $1.96 or -4.36% and September Brent crude oil closed at $45.75, down $1.88 or -3.95%.

The week started with crude oil under pressure late in the session after posting a fourth straight weekly loss the Friday before.  Sellers were influenced by rising production in the United States, Libya and Nigeria which offset an OPEC-led initiative to support the market by cutting production, trimming the global supply glut and stabilizing prices. There were also indications that demand growth in Asia, the world’s biggest oil-consuming region, was stalling.

The selling pressure continued on Tuesday with WTI crude oil breaking below $43.00 and Brent taking out $46.00. Production from the two OPEC members exempt from cutting supply, Nigeria and Libya, once again triggered the new leg down on the charts.

Nearby crude oil hit a 10-month low on Wednesday and the market officially entered a bear market after falling over 20-percent from its higher earlier this year. The selling was once again fueled by nagging fears about the global crude glut.

The selling pressure was interrupted briefly by the U.S. Energy Information Administration’s (EIA) weekly inventories report which showed a larger-than-expected drop in U.S. inventories.

According to the EIA, crude inventories declined by 2.7 million barrels the week-ending June 16, exceeding expectations for a 2.1 million-barrel drop.

Crude oil prices consolidated on Thursday and Friday because of oversold conditions.

In other news, according to oilfield experts Baker Hughes, the number of active oil in the United States increased by 11 last week, marking 23 weeks of gains. The U.S. total now stands at 758.

Forecast

Oil prices have been falling sharply since OPEC and other large producers agreed to extend their production cuts another nine-months until March 2018. There were hopes for deeper production cuts and a production ceiling for Nigeria, Libya, and Iran, all of which have been exempted from the accord because of various factors. However, the cartel and its friends chose to extend the timeframe. Since then prices have fallen like a lead balloon.

The supply glut has returned with a vengeance and shows no sign of letting up so we expect to see prices continue to weaken over the near-term. U.S. production is expected to continue to rise. The oil rig count was up again last week. With this news, U.S. output could hit 10 million barrels per day by year-end, from 9.3 million currently.

We could also see issues arising from the situation in the Middle East over Qatar. During Qatar’s fight with Saudi Arabia, it is getting aid from Iran. Because of this situation, the oil market sees stressed relationships which it perceives as negative for prices. This has led some to predict that the supply deal could unravel.

Barring an occasional short-covering rally due to oversold conditions, we’re looking for prices to continue to challenge multi-month lows over the near-term.