Oil Price Fundamental Daily Forecast – Prices Capped by Demand Concerns, Underpinned by Weak Dollar

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Monday but inside last Thursday’s wide range. The markets are being underpinned by the weaker U.S. Dollar and capped by concerns over demand as an escalation of tensions between the United States and China weigh on demand.

At 12:29 GMT, September WTI crude oil futures are trading $54.93, down $0.72 or -1.31% and October Brent crude oil futures are at $61.13, down $0.76 or -1.27%.

Last week, President Trump triggered a plunge in crude prices after he threatened to hit China with additional tariffs on September 1. Sellers hit the markets in anticipation of an escalation of the trade war with China, which could limit fuel demand by the world’s two biggest crude consumers.

Although the markets have settled into a two-day range, on August 1 they plunged more than 7% after Trump’s tweets drove prices to their lowest levels in about seven weeks. This led to a 1% drop in WTI crude for the week and a 2.5% weekly loss for Brent crude.

On Friday, China vowed to fight back against Trump’s decision. Today’s session began with traders anticipating retaliation by the Chinese.

The first move by China may have been its allowance of the yuan to tumble beyond the psychological 7-per-dollar level for the first time in more than a decade. This may be an early sign that Beijing officials may tolerate further currency weakness because of the trade dispute. A cheaper yuan would raise the cost of dollar-denominated oil imports in China, the world biggest crude oil importer. This would lead to lower demand for U.S. crude oil.

There are also rumors that if this were to occur, China would begin buying crude from Iran in violation of the U.S. sanctions against the country.

Bloomberg News is also reporting China has asked state-owned companies to suspend U.S. agricultural imports.

Daily Forecast

Demand for risky assets is down on Monday and crude oil traders are nervous. The inside trading range suggests investor indecision. Short-term, the weaker dollar could boost demand for dollar-denominated crude. Over the long-run, however, a prolonged trade dispute will hurt demand for crude oil.

Furthermore, the yuan falling below 7 per U.S. dollar suggests China has all but abandoned hopes for a trade deal with the U.S. This news, combined with the possibility of China buying Iranian crude oil could crush prices over the near-term. Bank of America Merrill Lynch Global Research can build a case for oil sinking by as much as $20 to $30 dollars per barrel.