Oil Price Fundamental Daily Forecast – Higher as Optimism Builds for China Demand Recovery

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging higher on Tuesday, recovering nearly all of yesterday’s sell-off from the intraday high.

Driving prices higher are hopes of a strong rebound in demand from China as it continues to recover from its strict COVID-19 restrictions. Nonetheless, gains are likely being limited by worries about further U.S. interest rate hikes dampening consumption in the world’s biggest economy.

Rate hikes are also making the U.S. Dollar a more attractive asset. A stronger greenback tends to weigh on foreign demand for dollar-denominated crude oil.

At 08:28 GMT, April WTI crude oil is trading $76.34, up $0.66 or +0.87% and May Brent crude oil is at $82.96, up $0.51 or +0.62%. On Monday, the SPDR Gold Shares ETF (GLD) settled at $168.97, up $0.62 or +0.37%.

Traders Focusing on China Factory Activity Report

China’s factory activity is expected to have continued to grow in February, a Reuters poll showed on Monday, suggesting that the flashes of domestic demand seen since the zero-COVID policy ended are now strong enough to rekindle upstream sectors, Reuters reported.

Domestic orders and consumption drove output higher and saw economic activity in the world’s second-largest economy swing back to growth in January, and economists expect manufacturers to have consolidated that position now that the country’s COVID-19 epidemic has “basically” ended.

The official manufacturing purchasing managers’ index (PMI) is expected to have improved to 50.5 in February, compared with 50.1 in January, according to the median forecast of 29 economists in a Reuters poll.

Positive Outlook for China Building

Optimism over the recovery in China is building with Goldman Sachs saying in a note on Sunday that it expects “a strong NBS manufacturing PMI reading of 51 in February,” owing to “continued improvements in steel demand and coal consumption.”

Additionally, last Friday, the People’s Bank of China (PBOJ) announced that the domestic economy is expected to generally rebound in 2023, although the external environment remains “severe and complex.”

The PBOJ also pledged to start improving social expectations and boosting confidence, with a focus on supporting the expansion of domestic demand.

“China’s economic recovery will drive its demand of commodities higher with oil positioned to benefit the most,” JP Morgan analysts said in a client note.

JPMorgan’s oil analysts maintained their 2023 average price forecast on Brent crude futures at $90 per barrel.

Short-Term Outlook

We’re bullish on crude oil because of the Russian output cuts and China’s improving recovery. But we also acknowledge that the market is facing some serious headwinds with the Fed likely to raise rates 25-basis points rate in March, May and June, respectively. This is expected to keep the U.S. Dollar unpinned while bringing the economy closer to recession.

Like the Fed, commodity markets are going to be data dependent until the Fed signals a pause in rate hikes. So we’re expecting to continue to see volatility as the Fed moves to tame inflation by possibly driving the economy into recession.

Traders will also be looking to the latest U.S. oil stocks data due from the American Petroleum Institute (API) industry group on Tuesday and the government’s Energy Information Administration on Wednesday for further demand indicators.

The API report, due to be released on Tuesday at 21:30 GMT, is expected to show crude stocks grew by 400,000 barrels in the week to Feb. 24, which would mark the tenth consecutive week of builds.