Oil Price Fundamental Daily Forecast – OPEC-led Cuts Underpinning Prices; China Deal Will Spike Prices Higher

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Friday, pressured by fresh concerns over China’s economic slowdown after another report showed weakening factory activity in the country. Underpinning the market is optimism over U.S.-China trade relations after the two-day high level meetings ended on Thursday with an upbeat tone.

At 0906 GMT, March WTI crude oil is trading $53.54, down $0.25 or -0.48% and April Brent crude oil is at $60.69, down $0.15 or -0.25%.

WTI prices rose to a two month high on Thursday after a Reuters poll showed the market is being supported by the OPEC-led supply cuts which began on January 1. The data showed OPEC pumped 30.98 million barrels per day (bpd) in January, down 890,000 bpd from December.

The U.S. sanctions imposed on Venezuelan state oil firm PDVSA are helping to keep supply off the market. Tankers stuck in ports are expected to accelerate the supply drop in February. Traders expect the sanctions to halt around 500,000 barrels per day (bpd) with an additional 350,000 bpd at risk.

Prices were further pressured by a report showing China’s factory activity shrank by the most in almost three years in January amid slumping orders.

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) came in at 48.3 in January – the second-consecutive month of contraction and the lowest reading since 2016. January’s reading was also weaker than the 49.5 that analysts polled by Reuters expected, and the 49.7 reported in December, CNBC said.

On a positive note, CNBC reported that U.S. President Donald Trump said on Thursday he will meet with Chinese President Xi Jinping soon to try to seal a comprehensive trade deal as Trump and his top trade negotiator both cited “substantial progress” in two days of high-level talks.

Forecast

The price action clearly indicates that the next major move in crude oil will be fueled by the outcome of U.S.-China trade relations. Simply stated, a deal has to get done by the self-imposed March 1 deadline or President Trump is likely to impose stiffer penalties on China. This is likely to lead to further weakness in China’s economy, which could eventually spread to the global economy.

China may try to stem the slide with additional measures to support the economy, but this week’s official and unofficial manufacturing PMI data shows that the current stimulus measures are not working enough to stimulate the economy.

The data from China is likely to continue to impact demand. However, losses may be limited as long as OPEC and its allies adhere to the production cuts schedule. Furthermore, rising equity markets and increased demand for risky assets could continue to underpin prices. Additionally, future demand may be helped by a weaker U.S. Dollar.