Oil Price Fundamental Weekly Forecast – Buyers Watch for Evidence of Covid-Related Demand Destruction

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures posted a strong recovery rally last week, but alas, the move still fell short of a pair of tops formed in early July.

The size and the speed of the rally from the July 20 bottom suggests that short-covering and buying may be behind the move, however, without a trading base, some traders relieve the steep rally will not be able to sustain itself. Fundamentally this means traders may want to see some definitive bullish news to support the rally and not just speculation.

Last Week, September WTI crude oil settled at $73.95, up $1.88 or +2.61% and October Brent crude oil finished at 75.41, up $1.31 or +1.74%.

Furthermore, for about two weeks, bullish traders have been operating under the guise that demand will continue to outstrip supply into at the end of the year. These traders essentially believe that the rate of vaccinations will outweigh the spread of the new COVID-19 Delta Variant.

Up until now, they probably have been right because there haven’t been any supply/demand reports or economic data to refute this belief. But now that we’ve had a full month of surging infections, the impact of the rapid spread may start to show up in the numbers.

The most obvious reports are Tuesday’s American Petroleum Institute (API) inventories data and Wednesday’s Energy Information Administration weekly inventories data. The have both been bullish catalysts for months and may have saved the market from a steep plunge last week.

However, they are likely going to be the first reports that point toward a drop in demand so their numbers will fall under increased scrutiny and traders are likely to become more sensitive to the data.

Traders have had about two weeks to prepare for the increased output from OPEC+, but that doesn’t mean they won’t have a negative reaction to the news that OPEC and its allies have begun to raise production by 400,000 barrels per day starting August 1.

Manufacturing in both China and the United States will also be at the forefront this week. By the time you read this traders will have already begun to react to the weak Manufacturing PMI data out of China and are now preparing for the U.S. Manufacturing PMI report, due to be released on Monday at 13:45 GMT.

Weekly Forecast

The resurgence in coronavirus cases will move to the forefront this week as traders look for evidence of demand destruction. They’ll be looking at the U.S Manufacturing PMI report early Monday. It is expected to come in at 60.8, up slightly from 60.6.

The second key indicator of early demand destruction will be an increase in gasoline stocks in either the API or EIA weekly inventories.