Oil Price Fundamental Daily Forecast – Conflicting Supply/Demand Outlooks Creating Uncertainty

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures inched higher on Friday after a steep intraday sell-off early in the session pressured prices most of the day. Friday’s modest gain helped soften the impact of a nearly 2% loss for the week.

The choppy price action was fueled by relatively light volume and the lack of conviction from traders. And who could blame the major hedge fund from having the clarity and conviction to take a major position with the supply/demand narrative seemingly changes every day?

On Friday, November WTI crude oil futures settled at $84.76, up $0.11 or +0.13% and December Brent crude oil futures finished at $90.05, up $0.44 or +0.49%. The United States Oil Fund ETF (USO) closed at $69.90, up $0.14 or +0.20%.

Earlier in the week, prices were supported by reports from the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA), which predicted global oil demand growing by between 2% and 3% this year and next.

Late in the week, however, the World Bank issued a stern warning about the state of the global economy saying, “The world may be edging toward a global recession in 2023.”

With inflation raging in countries around the world, from the U.S. to Australia, the World Bank is warning that in an attempt to rein in skyrocketing prices, central banks could cause some serious pain for consumers. If consumers start to feel pain then look for demand for fuel to fall along with crude oil prices.

OPEC, IEA: Insignificant Recession Impact on Oil Demand

Despite worries about economic slowdowns from the U.S. to China, neither OPEC nor the IEA expects the post-pandemic rebound in oil consumption to be significantly married by a possible recession.

“We are still optimistic,” OPEC’s new Secretary General Haitham Al Ghais told Reuters las month. “In 2023, there will be a slowdown in growth but it will not be something that we currently anticipate to be lower than historical norms.”

Generally bullish, the group of 13 oil exporting nations predicts an increase in demand of 3.1 million bpd this year and 2.7 million next year, according to a special report from Reuters.

The IEA – which acknowledged this week that demand growth would stall in the final three months of this year – still expects a 2 million bpd rise in oil consumption overall in 2022, to be followed by 2.1 million in 2023, Reuters reported.

World Bank Issues Recession Warning Which Should Weigh on Global Demand

World Bank researchers warned that decreased post-pandemic government spending, combined with rising rates worldwide, could lead to significant financial stress or even “trigger a global recession.”

“Global growth is slowing sharply, with further slowing likely as more countries fall into recession”, the World Bank added.

Short-Term Outlook

The crude oil market is conflicted between planning for increased demand or a recession. This is causing uncertainty, and when there is uncertainty, investors tend to sell or take to the sidelines until they can trade with clarity and conviction.

One problem for traders is the timing of a recession, mostly due to the lag in the release of economic data. In other words, they don’t know whether to plan for recession or wait until the economic data confirms a recession.

Meanwhile, if rising central bank interest rates are the problem, what will happen to the recession outlook if global policymakers collectively begin to slow the pace and size of interest rate hikes?

Most central bankers know pain will be inflicted on consumers from the rate hikes. Federal Reserve Chief Jerome Powell mentioned that specifically in his speech at Jackson Hole, Wyoming at the end of August. However, there is still the possibility of a short-lived recession or a “soft-landing” if central bank officials enact their exit strategies in a timely manner.

OPEC+ to the Rescue?

Additionally, some crude oil bulls are also counting on OPEC+ to trim output should demand fall significantly. Furthermore, the U.S. is expected to stop releasing oil from its Strategic Petroleum Reserve (SPR) in October. This should alleviate some of the supply pressures.

We’re looking for a mostly rangebound trade over the near-term. Although the market will have a hard time sustaining a meaningful rally due to lingering recession fears, this situation could be taken care of quickly with a well-timed supply disruption. Meaning:  Keep your eyes on OPEC’s October meeting.