Oil Price Fundamental Daily Forecast – Ripe for Short-Squeeze but Needs Help from Bullish EIA Data

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are inching higher early Tuesday after posting a spectacular rebound from steep losses the previous session.

Technically, buyers found value inside the major support zone at $88.26 to $81.85 with buyers stepping in at $86.28. Fundamentally, prices jumped as renewed concerns over tight supply dominated market sentiment after Saudi Arabia warned that the major oil producer could cut output to correct a recent oil price decline.

At 05:43 GMT, October WTI crude oil is trading $90.97, up $0.61 or +0.68% and December Brent crude oil is at $95.36, up $0.48 or +0.51%. On Monday, the United States Oil Fund ETF (USO) settled at $74.70, up $0.64 or +0.86%.

Saudi’s Warn OPEC+ Can Cut Output to Address Oil Slump

In keeping with its long-term plan to stabilize crude oil prices, OPEC stands ready to cut output to correct a recent oil price decline driven by poor futures market liquidity and macro-economic fears, which has ignored extremely tight physical crude supply, OPEC’s leader Saudi Arabia said on Monday and Reuters reported.

Saudi state news agency SPA cited Saudi Arabia Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman as telling Bloomberg OPEC+ has the means and flexibility to deal with challenges.

Why OPEC May Cut Production?

OPEC has a problem with thin futures market liquidity and excessive volatility and they have a plan to possibly fix that.

According to Prince Abdulaziz, the oil futures market has fallen into “a self-perpetuating vicious circle of very thin liquidity and extreme volatility”, making the cost of hedging and managing risks for market participants prohibitive.

“Without sufficient liquidity, markets can’t reflect the realities of the physical fundamentals in a meaningful way and can give a false sense of security at times when spare capacity is severely limited and the risk of severe disruptions remains high,” he said.

Short-Term Outlook

A move by OPEC to trim output could generate some near-term upside pressure if traders buy into the idea that the market remains vulnerable to supply disruptions due to global spare capacity issues instead of just focusing on the demand destruction narrative that seems to be dominating the headlines at this time.

Prince Abdulaziz is basically pointing out that the thin trading conditions in the futures markets are making it easier for a few dominate short sellers to control the price action by reacting to negative headlines regarding the potential decline in demand due to a possible global recession.

I’ve always believed that volatility works both ways and that thin-trading conditions in a down market can easily turn into a short-squeeze. Just look at what has happened in the natural gas market since August 8.

All it could take to trigger a massive short-covering market in crude oil is another bullish U.S. Energy Information Administration (EIA) inventories report on Wednesday. Last week’s bullish report turned the market higher rather quickly so a back-to-back bullish report on August 24 could do the same thing.