WTI and Brent Crude Oil

Oil Price Fundamental Weekly Forecast – Set Up for Volatility’s Return

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures posted their tightest trading ranges in 14 weeks as traders battled over both potentially bullish and bearish news. In the end, it looked like the bearish news slightly outweighed the bullish news. The inside move on the weekly chart indicates investor indecision and impending volatility.

Last week, September WTI crude oil futures settled at $56.20, up $0.44 or +0.79% and October Brent crude oil finished at $63.37, up $1.09 or +1.72%.

Weekly Recap

Factors Supporting Prices

On the bullish side, prices were supported by worries over a potential supply disruption in the Middle East. These fresh worries stem from Iran’s seizure of a British Oil tanker the previous week. While no one really anticipates a war between the two countries, the UK would like to get its tanker back. In the meantime, speculators built small long positions just in case the situation escalated. Prices were also underpinned by another large draw down in U.S. crude stockpiles.

Middle East Tensions

According to the latest reports, tensions remain high around the Strait of Hormuz because Iran is refusing to release the British flagged oil tanker it commandeered last week in the Gulf.

In the meantime, U.S. Secretary of State Mike Pompeo said Washington had asked Japan, France, Germany, South Korea, Australia and other nations to join maritime security efforts.

U.S. Energy Information Administration Weekly Inventories Report

According to the EIA, U.S. crude oil inventories declined 10.8 million barrels in the week ending July 19. Traders were expecting the EIA to report an inventory draw of 4.2 million barrels.

Gasoline inventories fell by 200,000 barrels last week, following the prior week’s 3.6 million barrel increase. Gasoline production, the EIA said, averaged 10.1 million bpd last week, up from 9.9 million bpd a week earlier.

Distillate fuel inventory increased 600,000 barrels. During the week-ending July 12, distillate fuel inventories jumped 5.7 million barrels. Production last week averaged 5.2 million barrels per day, versus 5.4 million bpd a week earlier.

Additionally, refineries processed 17 million bpd in the seven days to July 19, down from 17.3 million bpd processed on average in the previous week.

Factors Pressuring Prices

On the bearish side, gains were capped and prices pressured by concerns over a slowing global economy. Both OPEC and the International Energy Agency have recently issued reports showing supply to outstrip demand if the global economy continues to weaken. Traders continued to place the blame on US.-China trade relations. Traders are also taking their clues from weak manufacturing data in Europe and the United States. Furthermore, rate cutting central bankers are also raising fears over weakening economic conditions.

Weakening Global Economy

Recently, OPEC and the International Energy Agency warned of lower future demand. On Friday, a Reuters poll taken July 1-24 showed the growth outlook for nearly 90% of the more than 45 economies surveyed was downgraded or left unchanged. That applied not just to this year but also 2020.

Weekly Forecast

The price action suggests that something has to give on the fundamental side to trigger a breakout of the six-week range. We essentially have a tug of war in the market which is contributing to the rangebound trade. This condition is expected to continue until the economic data worsens or improves.

Pulling the plug on the tensions in the Middle East and further signs of a weakening global economy could trigger a plunge in the market. Rising U.S. stockpiles and production could help accelerate the move.

Bullish traders will be helped by an actual supply disruption in the Middle East, further drawdowns in U.S. stockpiles and major progress in the U.S.-China trade talks. The tension in the Middle East is likely to linger, but unless there is a major conflict that leads to a supply disruption, prices are not likely to move much.

The United States and China are scheduled to resume trade talks on Monday, but the two economic powerhouses may not even be close to a settlement. Crude oil traders showed limited reaction to this news, perhaps signaling a lack of confidence in the process.

Central bank officials will try to slow down the weakness in the global economy by cutting rates. However, these moves aren’t expected to have an immediate effect on crude oil demand.

Published by

James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.