Oil Price Fundamental Daily Forecast – Demand concerns help limit gains

U.S. West Texas Intermediate and international benchmark Brent crude futures are trading lower on Thursday morning amid concerns that the current rally may be overdone given the current supply and demand situation.

At 0635 GMT, August WTI crude was trading at $72.42, down $0.34 or -0.47%, and September Brent crude was at $77.22, down $0.24 or -0.31%.

Despite the overall perceived optimism, traders should note that there is a divergence in the market between WTI and Brent crude. WTI crude rose to a three-and-a-half-year high on Wednesday, while the nearest Brent futures contract rose to $77.22, down well below its May high of $80.05.

The price action makes sense, however, as OPEC increases Brent production, while Wednesday’s US government report showed a huge draw in US WTI inventories.

US Energy Information Administration Report

Despite the increase in U.S. production, U.S. commercial crude oil inventories fell by nearly 10 million barrels in the week ended June 22 to 416.64 million barrels, according to the EIA. That’s below the 5-year average of about 425 million barrels.

Production of 9.9 million barrels was well above the estimate of 2.4 million barrels. This was due to strong exports of nearly 3 million bpd, coupled with domestic refinery activity that reached a utilization rate of 97.5, the highest in more than a decade.

Forecast

While prices are likely to be supported by supply disruptions in Libya and Canada, we could be looking at a near-term spike if investors decide to shift their focus to the demand side of the equation.

Oil demand has been at a record pace all year, but conditions may change amid escalating trade disputes between the United States and its key trading partners China and the European Union.

Some traders say the macroeconomic outlook is overwhelmingly bearish. This is because credit conditions are worsening, which could have a negative impact on crude oil demand over the next 4-6 weeks. This could be because rising interest rates make it harder to borrow enough money to support current cash flow needs.

So while the price action over the past week has been impressive, it may have been driven by technical momentum and headlines. These are short-term catalysts. Investors in the medium and longer term are looking at rising production, with OPEC and Russia producing near maximum output and the US approaching another record high.

If supply continues to increase and demand should suddenly shift downward, we could be looking at a flood of oil in the market and that would be bearish for prices. Right now, there doesn’t seem to be much room for error in the supply/demand equation.

This article was originally posted on FX Empire

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