Oil Price Fundamental Daily Forecast – Prices Continue to Ease on COVID-19 Demand Destruction Concerns

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are inching lower early Wednesday after a steep break in the previous session, as a resurgence in COVID-19 cases in some countries raised fears of another round of demand destruction, undermining hopes for a steady recovery in the global economy.

At 06:10 GMT, October WTI crude oil futures are trading $36.52, down $0.24 or -0.65% and December Brent crude oil is at $40.06, down $0.30 or -0.74%.  On Tuesday, WTI dropped more than 8%, while Brent lost more than 5%.

Resurgence in COVID-19 Cases Weighing on Demand

With both major oil benchmarks trading close to three month lows, it appears that demand is moving backward, primarily due to surges in global COVID-19 cases. The global health crisis continues to flare unabated with cases jumping in India, Great Britain, Spain and several parts of the United States.

Refinery Profit Lift Could Be One Benefit from Drop in Demand

Although the continuing outbreak threatens demand, one group of analysts see it as a potential benefit for refineries struggling to make a profit.

Analysts at Eurasia said in a note, the outbreak is threatening hopes for a global economic recovery that could reduce demand for fuels from aviation gas to diesel, although the price slump could lift refinery profits back into positive territory.

“That would be a major move and potentially a sign for the industry that the crude production and processing capacity reductions have finally met their goal in adjusting the industry in line with lower demand,” it said.

China’s Factory Gate Prices Fell for Seventh Straight Month in August

In news that could affect future demand, China’s factory gate prices fell for the seventh straight month in August but at the slowest annual pace since March, suggesting the industries of the world’s No. 2 economy continued to recover from the sharp coronavirus-induced downturn.

The producer price index (PPI) eased 2.0% from a year earlier in August, the National Bureau of Statistics (NBS) said on Wednesday. That was in line with expectations in a Reuters poll, but the decline was more modest than the 2.4% fall in July.

The consumer price index (CPI) meanwhile rose 2.4% last month from a year earlier, as expected, slower than a 2.7% annual increase in July.

Daily Forecast

Prices are likely to continue to fall over the near-term until they hit a value area on the charts that proves to be attractive to buyers. However, don’t mistake this for a change in the demand outlook. Users will buy relatively cheap oil if they can store it for later use. This is why prices go down in the first place.

We could see a technical bounce due to short-term oversold conditions, but any meaningful short-covering rally is likely to be pounced on by aggressive short-sellers. Nobody likes to short in the hole even if they think prices are going to continue to fall so the best thing to do in some cases is to wait for a rebound rally.

Due to Monday’s Labor Day holiday, there will be no U.S. Energy Information Administration weekly inventories report on Wednesday. It has been move to Thursday. However, the American Petroleum Institute will release its weekly stats at 14:30 GMT.