Oil Price Fundamental Daily Forecast – Adequately Supported, but Needs Demand Bump to Sustain Rally

James Hyerczyk
Updated
The combination of the OPEC-led production cuts, the increased reduction by the Saudis and in a limited way, the sanctions against Venezuela are helping to underpin prices, but in order to put the market over the top, demand is going to have to increase.

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading higher on Wednesday, supported by deeper-than-expected OPEC-led production cuts and the impact of U.S.-led sanctions on Venezuela oil exports. Despite these moves, on a macro level, the global oil market remains well-supplied. Additionally, gains are being limited by weakening global demand.

At 07:56 GMT, April WTI crude oil is trading $53.82, up $0.35 or +0.65% and April Brent crude oil is at $62.94, up $0.52 or +0.83%.

Production Cuts Supportive, but Global Market Remains Well-Supplied

On the supply side, Saudi Arabia, the defector leader of OPEC, said it was cutting daily production and exports by a further 500,000 barrels per day (bpd) on top of its agreed OPEC quota reduction. Since January 1, an OPEC-led group has been cutting at least 1.2 million barrels per day from production in an effort to trim the global supply and stabilize prices. On Tuesday, the Saudis said it had cut its output by almost 800,000 bpd in January to 30.81 million bpd.

In the meantime, the political rift between Venezuela and the United States continues with the U.S. sanctions against the South American nation giving prices a slight boost.

Goldman Sachs said on Tuesday, “With so far no sign of change in government, we see increasing risks that production losses could be larger and sooner than our forecast for a 0.33 million-bpd supply loss in 2019.”

Meanwhile, Barclays bank added, “Oil production is rapidly falling and companies that normally resell Venezuelan crude have not found ways to mitigate the effect of the U.S. sanctions”.

Additionally, the International Energy Agency said energy market participants may be able to adjust to U.S. sanctions against Venezuela’s crude industry.

“The imposition of sanctions by the United States against Venezuela’s state oil company Petroleos de Venezuela (PDVSA) is another reminder of the huge importance for oil of political events,” the IEA said.

“Even so, headline benchmark crude oil prices have hardly changed on news of the sanctions. This is because, in terms of crude oil quantity, markets may be able to adjust after initial logistical dislocations,” the group added.

The IEA further added that traders shouldn’t expect U.S. sanctions against Venezuela to fuel a rally in oil prices.

Oil Prices Supported After API Reports Surprise Crude Draw

The American Petroleum Institute (API) reported a smaller-than-expected draw of 998,000 barrels during the week-ending February 8. Analysts were looking for a build of about 2.300 million barrels.

Gasoline inventories for the same period rose 746,000 barrels. Analysts were looking for a build of 508,000 barrels for the week. Distillate inventories decreased by 2.481 million barrels versus an expected draw of 1.090 million barrels.

Daily Forecast

The combination of the OPEC-led production cuts, the increased reduction by the Saudis and in a limited way, the sanctions against Venezuela are helping to underpin prices, but in order to put the market over the top, demand is going to have to increase.

Helping to keep a lid on the market are adequate global inventories, the prospect of weakened demand tied both to U.S.-China trade and broader economic concerns, and the approach of seasonal refinery maintenance.

The biggest impact on demand will be a U.S.-China trade deal. That may be in the works, but it could take several months to feel its influence. In the meantime, the markets seem well supported with buyers just waiting for any signs of increased demand.

Please let us know what you think in the comments below. 

This article was originally posted on FX Empire

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