Oil Price Fundamental Daily Forecast – Underpinned by Upbeat China News, but Capped by Lingering COVID Worries

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging higher on Monday, but inside Friday’s range, suggesting investor indecision and impending volatility. The markets are being underpinned by optimism tied to the reopening of China’s borders and expectations of a weaker U.S. Dollar.

At 06:16 GMT, March WTI crude oil futures are trading $75.19, up $1.15 or +1.55% and March Brent crude oil is at $79.68, up $1.11 or +1.41%. On Friday, the United States Oil Fund ETF (USO) settled at $64.83, up $0.05 or +0.08%.

China COVID Worries Weigh

Despite the potentially bullish news, market sentiment remains negative as China’s battle with COVID-19 worsens. Additionally, even after removing most virus-related restrictions, traders are worried that a surge in cases across the country could stifle economic activity.

Furthermore, concerns remain that the massive flow of Chinese travelers may cause another surge in COVID infections.

US Traders Pricing in Supply Surplus

COVID concerns and U.S. supply issues are being reflected in the market structure for the benchmark oil futures. Both front-month Brent and WTI contracts are in contango, when current prices are below prices for later-delivery contracts, which typically indicates bearish sentiment for the market.

Furthermore, energy prices for crude oil, refined products and natural gas have plummeted in the New Year as traders have reconsidered near-term worries over cold weather and fears of supply shortages and dumped contracts.

Finally, energy services firm Baker Hughes Co said on Friday that U.S. energy firms cut the number of operating oil and natural gas rigs by seven, the biggest weekly decline since Sept. 2021.

China Reopening is the Wildcard

China entered a “new phase” in the fight against COVID-19 over the weekend by opening its borders for the first time in three years. In response to the move, some 2 billion citizens are expected to travel during the Lunar New Year season. This is nearly double last year’s movement, which represents a recovery of 70% of 2019 levels, according to Beijing.

With the rise in travel, however, comes the risk of an even greater spread of COVID infections.

Short-Term Outlook

Another major factor that is likely to control the direction of crude oil prices over the near-term is hopes for less-aggressive U.S. interest rate hikes by the Federal Reserve. This will have a bearish influence on the U.S. Dollar, which could boost oil prices. A weaker greenback makes dollar-denominated commodities more affordable for investors holding other currencies.

After Friday’s U.S. reports showed cooler wage growth and a contraction in the services industry, the odds of a Fed rate hike on Feb. 1 rose for a 25 basis point rate hike, and fell for a 50 basis point rate hike. This drove down Treasury yields and the U.S. Dollar, while underpinning crude oil prices.

Thursday’s U.S. consumer inflation report could set a bullish tone for crude oil over the near-term if it shows inflation is weakening.