Oil Price Fundamental Daily Forecast – Recession Fears Challenging Supply Disruption Concerns

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging lower as rising interest rates and a strong U.S. Dollar weigh on demand for the dollar-denominated commodities.

Furthermore, worries about a global recession are also pressuring prices, offsetting recent comments from OPEC and the IEA suggesting fresh demand was on the horizon. Meanwhile, helping to limit losses are concerns about future supply disruptions due to the European Union’s anticipated embargo on Russian oil in December.

At 07:58 GMT, November WTI crude oil is trading $83.84, down $0.92 or -1.09% and December Brent crude oil is at $89.43, down $0.62 or -0.69%. On Friday, the United States Oil Fund ETF (USO) settled at $69.90, up $0.14 or +0.20%.

Firm Dollar Weighs on Demand

The dollar firmed as investors braced for a packed week of central bank meetings that are certain to see borrowing costs rise across the globe, with some risk of a super-sized hike in the United States.

Markets are fully-priced for a 75 basis point rate hike by the Swiss National Bank (SNB), but are on the fence over whether the Bank of England (BoE) makes a move toward 50 or 75 basis points. In the United States, traders are already fully-priced for a rise in interest rates of 75 basis points from the Federal Reserve, with futures showing a 20% chance of a full percentage point.

Recession Fears Rising

Tightening monetary policy is expected to slow economic growth, while several financial market indicators suggest that traders expect to see recessions around the world, which could slow global oil demand growth.

Traders are clearly focused on the negatives which is making it difficult for crude oil to sustain a rally. The inability to extend a rally beyond a few days is mostly the result of fears on an economic slowdown in China, a recession in Europe’s major economies, and a slowdown or recession in the United States.

The timing of a recession is always difficult, but crude oil traders seem to be willing to sell now, define a recession later. The consensus says Europe is just a month or two away from a major recession. China would quickly follow. But in the U.S., a recession may be delayed for up to six months because of the resiliency of the labor market.

Short-Term Outlook

Recession fears create uncertainty, and when there is uncertainty, traders liquidate or short the market, hoping for more favorable buying opportunities.

At the same time, optimism can slow down the selling pressure, which is what I think we’re seeing now because prices have gone down, but haven’t collapsed.

The optimism is being fueled by closely watched major forecasters from OPEC, the EIA and the International Energy Agency (IEA). They continue to expect growth in global oil demand both this year and next, with demand outpacing pre-COVID levels in 2023.

It’s this developing balance between the pessimists and the optimists that is creating the rangebound environment.