Oil Price Fundamental Daily Forecast – Positive China Services Data Fueling Short-Covering Rally

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging higher early Wednesday on a slight increase in demand for risky assets and a weaker U.S. Dollar, which is helping to generate foreign demand for the dollar-denominated asset. The boost in prices is being primarily driven by positive news from China’s services sector.

At 10:52 GMT, October WTI crude oil is trading $54.47, up $0.53 or +0.98% and December Brent crude oil is at $57.86, up $0.39 or +0.68%.

Despite the early strength, the buying has been tentative and is most likely being fueled by short-covering. The better-than-expected services sector data from China is not strong enough news to offset Tuesday’s weak ISM US Manufacturing PMI data so I expect gains to be capped at some point today. Furthermore, Euro Zone activity shrank for a seventh month so there just isn’t even bullish news from the global economy to sustain any long-term upside momentum.

Citi Analysts Cut Brent Forecasts

Citi cut its Brent forecasts for the third and fourth quarters by about $10 a barrel to $62 and $64 respectively, and expects the benchmark to fall to $53 by the end of 2020. Brent is about 23% lower than its peak for this year in April.

“Next year the curtailment of demand growth coming from lower GDP (gross domestic product) growth expectations and continuation of the U.S.-China trade war could shave more oil demand from the market,” Citi analysts wrote.

Lower Demand Still an Issue

The positive services data from China is not a market turning event, but Tuesday’s contraction in the U.S. manufacturing sector is an important event that could be an early indication that future demand will fall.

Stephen Brennock of oil broker PVM said, “The bullish bandwagon seen earlier this year will not be making another appearance.” He further added, “Spearheading these dimming prospects (are)…cooling global economic activity and intensifying trade tensions. The world economy is slowing and nowhere is this pullback in activity more apparent than in the manufacturing sector.”

Daily Forecast

Prices could firm throughout the session if demand for risk continues to rise, but this is not expected to turn into a long-term event. It’s just short-covering.

Late in the day at 20:30 GMT, the American Petroleum Institute (API) will release its latest report on weekly inventories. This report could produce a volatile response.

The API report is expected to show inventories declined for a third straight week.