Oil Price Fundamental Daily Forecast – Stronger as Supply Concerns Offset Demand Worries

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging higher on Tuesday in a volatile, two-sided trade. After trading lower early in the session on concerns about lower demand in China and aggressive increases in U.S. and European interest rates, the market recovered to turn higher for the session on the back of worries about tight fuel supplies ahead of winter.

At 09:27 GMT, October WTI crude oil is trading $88.77, up $0.99 or +1.13% and December Brent crude oil is at $93.75, up $0.82 or +0.88%. On Monday, the United States Oil Fund ETF (USO) settled at $72.36, up $1.26 or +1.77%.

Moves by Chinese Government Indicate Weakening Economy

Crude oil prices fell early Tuesday on worries over Chinese demand as the government announced it will continue to roll out phased policies to stabilize its economy with a focus on reviving consumption and boosting investment, and implement these policies as soon as possible, according to Premier Li Keqiang.

This is a sign that the economy is weakening, which is raising concerns over falling demand for crude oil.

The world’s second-largest economy narrowly avoided contracting in the second quarter amid widespread COVID-19 lockdowns and weakness in the property market which have dented consumption and factory activity.

Recent data showed China’s economy lost further momentum in August, with factory activity extending declines and export growth slowing as demand wanes amid strict COVID restrictions.

In other sign of slowing demand, the number of trips taken over China’s three-day Mid-Autumn Festival holiday shrank, with tourism revenue also falling, official data showed, as strict COVID-19 rules discouraged people from travelling, Reuters reported.

Rising Interest Rates Raising Concerns over Economic Slowdown in US, Europe

Recent hawkish comments from Federal Reserve and European Central Bank (ECB) officials have put investors on alert for possible recessions in the U.S. and Europe. The U.S. economy is a lot stronger than the Euro Zone economy at this time, nonetheless, an economic slowdown will lead to lower demand for crude.

Today’s U.S. consumer inflation report is expected to lock in a 75 basis point rate hike by the Fed next week. Over the weekend, ECB policymakers called for more aggressive rate hikes to combat soaring inflation.

The key today will be how the report affects the U.S. Dollar since crude oil is a dollar-denominated commodity. A stronger dollar tends to be bearish for crude. A weak dollar could be supportive.

Tighter Inventories Supporting Prices

On Tuesday, worries about tighter inventories are offsetting concerns over lower demand. One worry is the huge drop in the Strategic Petroleum Reserve (SPR). During the week-ending September, the SPR dropped to 434.1 million barrels, its lowest level since October 1984.

Additionally, today’s American Petroleum Institute (API) and Wednesday’s U.S. Energy Information Administration (EIA) weekly inventories reports are expected to show that crude oil supplies are expected to drop by around 200,000 barrels in the week-ending September 9. This would be the fifth straight weekly draw down.