Oil Price Fundamental Daily Forecast – Rumors of Increased China Buying Helps Erase Supply-Driven Weakness

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures inched higher on Thursday in a volatile session. Early in the day, the markets were pressured by an unexpected rise in U.S. crude inventories and a strong U.S. Dollar, but they reversed course later on reports China was prepared to buy more oil and other energy supplies to meet growing demand.

On Thursday, December WTI crude oil futures settled at $74.70, up $0.20 or +0.27% and December Brent crude oil finished at $78.31, up $0.22 or +0.28%.

Some traders blamed the expiration of NYMEX products and Brent crude for the spike in volatility.

US Dollar Volatility May Have Fueled Crude’s Two-Sided Trade

A two-side swing in the U.S. Dollar on Thursday may have encouraged crude oil shorts to book profits after trading weaker most of the week.

Crude oil edged lower early Thursday after the U.S. Dollar tested its highest level in a year. It posted a dramatic intraday reversal later in the day, however, after the greenback turned lower due to a rise in U.S. Weekly Jobless Claims. Since crude oil is a dollar-denominated commodity, it tends to react to volatility in the U.S. Dollar. A weaker dollar, for example, tends to lead to increased foreign demand for crude.

Gains Being Capped by Unexpected Rise in US Crude Inventories

U.S. crude oil, gasoline and distillate inventories rose last week as the production rebounded from recent storms, the Energy Information Administration said on Wednesday.

Crude oil inventories rose by 4.6 million barrels in the week to September 24 to 418.5 million barrels, EIA data showed, compared with analysts’ expectations in a Reuters poll for a 1.7 million-barrel drop.

U.S. gasoline stocks posted a modest gain of 193,000 barrels to 221.8 million barrels, compared with expectations for a 1.4 million-barrel rise.

Distillate stockpiles, which include diesel and heating oil, rose by 385,000 barrels in the week to 129.7 million barrels, versus expectations for a 1.6 million-barrel drop.

Chinese Official Hints at Increased Demand

China Premier Li Keqiang said the world’s biggest crude importer and No. 2 consumer will ensure its energy, power supply and will keep economic operations within a reasonable range.

Traders interpreted this to mean they would be willing to pay anything for enough crude and products to sustain its economic recovery.

Li Keqiang probably made the comment because China has been experiencing a power crisis and housing market problems that have been weighing on demand. Additionally, China’s factory activity unexpectedly shrank in September due to wider curbs on electricity use and elevated input prices.

Short-Term Outlook

With US supply rising, crude oil traders are worried about where the demand will come from to offset these gains. Although some analysts still believe there will be a global oil shortage as long as OPEC+ keeps a lid on production and the number of COVID-19 cases decline as vaccinations increase.

The near-term wildcard is whether OPEC and its allies decide to increase production at its October meeting. This could have near-term ramifications.

Those who support a production increase believe that rapidly rising crude oil prices could lead to demand destruction.