Oil Price Fundamental Daily Forecast – More Downside Expected as Recession Fears Mount

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished lower on Friday, erasing all of the previous session gains while putting the markets in a position to feel some pressure early next week.

Both domestic and international crude oil prices were weighed down by concerns about the outlook for energy demand amid the rising possibility of a global recession.

On Friday, December WTI crude oil futures settled at $84.65, down $3.30 or -3.75% and December Brent crude oil closed at $91.63, down $2.94 or -3.11%. The United States Oil Fund ETF (USO) finished at $70.15, down $2.37 or -3.27%.

The catalysts behind the selling pressure were a downward revision in the International Energy Agency’s (IEA) oil demand forecast and worries over Chinese demand.

Meanwhile, the U.S. Dollar continued to strengthen, weighing on foreign demand for the dollar-denominated asset, amid bets the Federal Reserve will aggressively tighten its monetary policy to bring down inflation.

In other news, a report from Baker Hughes showed on Friday the number of oil rigs increased.

Recession Worries Offset OPEC+ Production Cuts

WTI and Brent crude oil futures were in the midst of a ten session rally at the start of the week when the first fears of a global recession were felt. The selling pressure increased later in the week after the IEA said OPEC+’s plan from the previous week to cut output could tip the global economy into recession.

“The relentless deterioration of the economy and higher prices sparked by an OPEC+’s plan to cut supply are slowing world oil demand,” the Paris-based agency, which includes the United States and other top consumer countries, said.

Additionally, China, the world’s largest crude oil importer, has been fighting COVID-19 flare-ups after a week-long holiday. The country’s infection tally is small by global standards, but it adheres to a zero-COVID policy that is weighing heavily on economic activity and thus oil demand.

Surprisingly Strong US Consumer Sentiment Boosts US Dollar

While some thought a jump in U.S. consumer sentiment would’ve been bullish for crude oil demand, this wasn’t the case as traders perceived this news to mean the Federal Reserve would have to be more aggressive with rate hikes to drive down inflation.

Higher rates leads to greater demand for the greenback, which tends to weigh on foreign demand for dollar-denominated asset. The improvement in sentiment only means the Fed has to work harder to push down consumer demand and slow down the economy, which does not bode well for higher prices.

Short-Term Outlook

It’s hard to build a case for higher crude oil prices over the near-term because it looks as if traders have shifted into the “sell the rally” mode. I also think this is a bet against OPEC making further production cuts.

Meanwhile all eyes will be on economic news from China next Tuesday. The reports investors will be eyeing are Retail Sales, Fixed Asset Investment, Industrial Production and Gross Domestic Product.

The GDP report is the most important. It is expected to recover from a 0.4% reading to a 3.4% gain.

Sentiment has definitely shifted with most major players now expecting a recession despite the Fed’s attempt at a soft-landing. I don’t expect the market to go straight down, but it is now extremely data dependent. This means traders are going to respond to nearly every economic report – both the good and the bad. This suggests a choppy trade over the near-term with a bias to the downside.