Oil Price Fundamental Daily Forecast – US Dollar Rebound, Rising China COVID Cases Sink Crude

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Monday after giving back earlier gains. The catalysts behind the weakness are a firmer U.S. Dollar and reports of record high coronavirus cases in major Chinese cities that could weigh on demand.

At 10:37 GMT, January WTI crude oil is trading $87.18, down $0.98 or -1.11% and January Brent crude oil futures are at $95.05, down $0.94 or -0.98%. On Friday, the United States Oil Fund ETF (USO) settled at $74.36, up $2.12 or +2.94%.

Early Strength Fades

Traders bought early in the session in anticipation of a weaker U.S. Dollar and optimism over future demand from China. Contracts for Brent crude and U.S. WTI edged up nearly 1%.

The markets reversed their trajectory and headed lower as the U.S. Dollar surprisingly strengthened, weighing on dollar-denominated crude and other commodities. Furthermore, traders may have also felt they got a little too ahead of the news that China was easing its COVID related quarantine measures.

Fed Official’s Comments Boost Dollar, Sink Oil Prices

The U.S. Dollar firmed against a basket of major currencies after comments from U.S. Federal Reserve Governor Christopher Waller also weighed on oil. Waller said on Sunday that the Federal Reserve may consider slowing the pace of rate increases at its next meeting, but that should not be seen as a “softening” in its commitment to lower inflation.

Waller also added that the markets should now pay attention to the “endpoint” of rate increases, not the pace of each move, and that endpoint is likely still “a ways off.”

Waller’s comments came across as hawkish, sending Treasury yields and the greenback higher, driving down demand for dollar-denominated crude oil.

China’s COVID Surge Renews Demand Fears

Record high coronavirus cases in major Chinese cities dashed hoped of the reopening of the economy of the world’s biggest crude importer.

Today’s news from China offset last week’s bullish comments from the Chinese government. Crude oil prices rose on Friday after China’s National Health Commission adjusted its COVID prevention and controls measures to shorten quarantine times for close contacts of cases and inbound travelers and eliminate a penalty on airlines for bringing in infected passengers.

Short-Term Outlook

China’s COVID restrictions and the direction of the U.S. Dollar are the two wild cards likely to drive the short-term direction of crude oil prices. They are wildcards because the market can move either way on news related to these two factors.

A stronger dollar and increasing COVID cases will be bearish for oil prices. A weaker dollar and a drop in COVID cases or a further easing of government restrictions will be bullish for crude.

Longer-term, the market continues to be supported by the on-going OPEC+ production cuts and the upcoming European Union (EU) embargo of Russian oil.