Oil Price Fundamental Weekly Forecast – Could See Further Short-Covering Ahead of US-China Trade Talks

The short-covering rally on Friday was impressive, but it’s too early to call it a change in trend. However, short-term momentum may have shifted. This could help produce a short-covering rally early in the week. Furthermore, some technicians are calling the markets oversold after a relentless 13 session sell-off.
James Hyerczyk
WTI and Brent Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed lower last week, but a rally on Friday helped reduce some of the steep loss from earlier in the week.

Crude oil has been trending lower since September 16 as concerns over demand have outweighed demand. These worries were elevated last week because of weaker-than-expected U.S. economic data. At the start of the week, oil traders were expressing confidence in the U.S. economy, but are now worried that the slowing global economy has spread to the United States.

Last week, November WTI crude oil settled at $52.81, down $3.10 or -5.54% and December Brent crude oil finished at $58.37, down $2.67 or -4.57%.

Contributing to the early weakness was a larger-than-expected build in U.S. crude inventories according to a government report on Wednesday. This surprise news drove prices sharply lower because it followed a report from the American Petroleum Institute (API) on Tuesday that showed an unexpected drawdown. This created uncertainty for traders.

Prices were also pressured by the news that Saudi Aramco had restored full oil production and capacity to the levels they were at before attacks on its facilities on September 14.

U.S. Energy Information Administration Weekly Inventories Report

On Wednesday, the EIA reported an inventory build of 3.1 million barrels for the week-ending September 27. Analysts were looking for a build of 2.4 million barrels.

The EIA also reported a 200,000-barrel decline in gasoline stockpiles, which compares with a 500,000-barrel rise in the previous week. Distillate inventory was down 2.4-million barrels.

The API reported late Tuesday a large crude oil inventory draw of 5.92 million barrels for the week-ending September 26. Traders were looking for a 1.567 million barrel build.

The divergence between the API and EIA reports was expected because the attacks on Saudi production on September 14 probably skewed the data. The differences could be reconciled within a week or two.

Economic Data Producing Two-Sided Trade

Crude oil prices were hit hard on October 1 after a weaker-than-expected ISM Manufacturing PMI report fanned the flames of recession. Later in the week, the losses were extended after the ISM Non-Manufacturing PMI report came in below expectations.

Crude oil traded higher on Friday following the release of a solid U.S. jobs report. The news helped ease concerns over lower demand due to a U.S. recession. This may carry over into this week.

Weekly Forecast

The short-covering rally on Friday was impressive, but it’s too early to call it a change in trend. However, short-term momentum may have shifted. This could help produce a short-covering rally early in the week. Furthermore, some technicians are calling the markets oversold after a relentless 13 session sell-off.

Some traders are saying sellers lightened up on the short side as the markets approached their August bottoms. Nonetheless, the fundamentals are bearish and the markets are not in a position to change the trend to up at this time. However, they may be due for a normal technical correction that could alleviate the oversold condition.

We could see more aggressive short-covering ahead if geopolitical issues escalate in the Middle East. Additionally, optimistic traders may decide to lighten up on the short side or take speculative long positions ahead of the start of U.S.-China trade talks on October 10-11.

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