Oil Price Fundamental Daily Forecast – IEA Cuts Oil Demand Growth

Friday’s marginal gains and recovery from early session weakness is not enough to get excited about a rally. It’s just price action led by short-covering and position-squaring. The hedge funds are short and likely looking to add to positions in the wake of today’s bearish IEA report.
James Hyerczyk
WTI and Brent Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging higher on Friday shortly before the regular session opening after clawing back earlier losses. Helping to keep a lid on prices are concerns that the trade dispute between the United States and China will lead to a global economic slowdown and lower demand. However, the market is also being underpinned by expectations of more OPEC production cuts.

At 09:03 GMT, September WTI crude oil is at $52.82, up $0.28 or +0.51% and October Brent crude oil is at $57.81, up $0.43 or +0.84%.

U.S.-China Relations Worsen

There is not much optimism over the U.S. and China reaching a trade deal anytime soon. Conditions could even worsen as both try to force the other side into making an unfavorable deal. President Trump raised tensions a week ago when he announced new tariffs on China. Then the world’s second largest economy retaliated by letting its currency drift below the psychologically important 7 yuan to the dollar level, and cancelling all U.S. agricultural deals.

Crude will have very little chance of sustaining a rally if the U.S. and China continue to try to weaken each other’s stance.

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IEA Cuts Demand Growth Forecast

Earlier today, the International Energy Agency (IEA) cut its global oil demand growth forecasts for this year, citing fears of an economic downturn. The energy agency now expects oil demand growth to reach 1.1 million barrels per day (b/d) in 2019 and 1.3 million b/d in 2020. That constitutes a downward revision of 100,000 b/d for this year and 50,000 b/d for next year.

In its closely-watched monthly oil report, the IEA said there was “growing evidence of an economic slowdown” with many large economies reporting weak gross domestic product (GDP) growth in the first half of the year.

“The situation is becoming even more uncertain,” the IEA said, before describing global demand growth in the first half of the year as “very sluggish.”

“Meanwhile, the prospects for a political agreement between China and the United States on trade have worsened. This could lead to reduced trade activity and less oil demand growth.”

Looking ahead, the IEA said the outlook for oil demand growth is “fragile,” with a greater likelihood of a downward revision than an upward one.

Daily Forecast

Friday’s marginal gains and recovery from early session weakness is not enough to get excited about a rally. It’s just price action led by short-covering and position-squaring. The hedge funds are short and likely looking to add to positions in the wake of today’s bearish IEA report.

There is a wildcard out there. It’s China’s interest in U.S. oil. Recently showed Chinese buyers rekindled their interest in U.S. crude, as imports climbed to a nine-month high of 247,000 barrels per day, according to the Energy Information Administration (EIA). This, however, may have been a goodwill gesture tied to the on-going trade negotiations. Because of the increasing tensions between the two countries, China may decide to dramatically reduce its intake of U.S. crude imports. This could trigger another steep break in prices.

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