Oil Price Fundamental Daily Forecast – Underpinned by Robust Hedge Fund Buying

James Hyerczyk
Updated: Jan 24, 2023, 16:31 UTC

Investors have piled back into oil futures at the fastest rate for more than two years as concerns about a global business cycle downturn have eased.

WTI and Brent Crude Oil

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U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are nearly flat on Tuesday as traders balance hopes of a fuel demand recovery from top importer China with growing concerns about at slowdown in the U.S. economy.

At 10:40 GMT, March WTI crude oil is at $81.51, down $0.11 or -0.13% and March Brent crude oil is trading $88.14, down $0.05 or -0.06%. On Monday, the United States Oil Fund ETF (USO) settled at $71.47, down $0.08 or -0.11%.

Bullish Outlook as Hedge Funds Return

In what can only be seen as a bullish sign that perhaps the heavy selling pressure is over, portfolio investors have piled back into petroleum futures and options at the fastest rate for more than two years as concerns about a global business cycle downturn have eased, according to John Kemp at Reuters.

Kemp wrote that hedge funds and other money managers purchased the equivalent of 89 million barrels in the six most important petroleum contracts over the seven days ending on Jan. 17.

Purchasing was the fastest since November 2020 (shortly before the first successful coronavirus vaccine trials were announced) and before that April 2020 (when the first lockdowns started to be eased), Kemp added.

Kemp said the sudden turn around seems to have been driven by a combination of low initial positioning and a sudden increase in confidence about the outlook for the global economy and oil consumption. Recent inflation data have shown the rate of price increases is moderating, which has raised hopes for an early peak in the interest rate cycle.

Commodities Set to Outperform Other Asset Classes Again in 2023, Says Goldman

In other potentially bullish news for crude oil prices, analysts at Goldman Sachs said on Monday that commodities are set to generate “superior total returns” in 2023 and likely to outperform other asset classes again, driven by a fundamental shift in the global macroeconomic landscape and low inventories.

“Oil markets are not pricing the expected uplift in demand combined with the downturn in Russian production,” Goldman Sachs said, adding “China’s reopening is a game-changer.”

Easing of COVID-19 curbs in China and expectations around smaller rate hikes from the U.S. Federal Reserve lifted hopes around strong demand outlook for commodities.

“Commodities like crude oil, refined petroleum products, LNG, and soybeans are particularly set to benefit from China’s demand tailwind,” the bank said.

Short-Term Outlook

Despite Goldman Sachs’ bullish outlook, the crude oil market could still face some headwinds because of a recession. This won’t totally derail the chances of a bull market in crude oil, but it could slow growth. It all depends on whether the recession is a soft or hard one.

Furthermore, there is still a little uncertainty over how quickly China’s crude demand bounces back this quarter. A lot will depend on how fast China opens its borders and whether the current Lunar New Year celebrations leads to a surge in COVID-19 cases.

Later today at 21:30 GMT, the American Petroleum Institute will release its latest weekly inventory figures. U.S. stocks of crude oil and gasoline are expected to have risen last week while distillate stocks were forecast to fall.

For a look at all of today’s economic events, check out our economic calendar.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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