Oil Price Fundamental Weekly Forecast – COVID-19 Demand Destruction Worries Move to Forefront

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished higher last week, helped by the possibility that OPEC and its allies could take action to stabilize or increase their production cuts, an unexpected plunge in U.S. stockpiles and an extremely weak U.S. Dollar.

Gains may have been limited by a steady rise in coronavirus infections and as the outcome of the U.S. presidential election remained unsettled as of Friday’s close.

Last week, December WTI crude oil futures settled at $37.14, up $1.35 or +3.77% and January Brent crude oil finished at $39.45, up $1.99 or +5.04%.

Bullish Factors

US Crude Oil Stockpiles Fell Sharply

U.S. crude oil stockpiles fell sharply the previous week, as a storm cut production in the U.S. Gulf of Mexico, while gasoline stocks increased and distillate inventories fell, the Energy Information Administration said last Wednesday.

Crude inventories fell by 8 million barrels in the week to October 30, compared with analysts’ expectations for an increase of 890,000 barrels. Gasoline stocks rose by 1.5 million barrels, compared with analysts’ expectations in a Reuters poll for a 871,000-barrel drop. Distillate stockpiles, which include diesel and heating oil, fell by 1.6 million barrels, versus expectations for a 2.0 million-barrel draw, the EIA data showed.

Crude production fell 600,000 barrels per day to 10.5 million bpd last week, the EIA said. Stocks at the Cushing, Oklahoma delivery hub for U.S. crude futures rose by 936,000 barrels, the EIA said. Refinery crude runs rose by 164,000 bpd and refinery utilization rates rose by 0.7 percentage points, EIA data showed.

Political Uncertainty, Divided Congress Weigh on US Dollar

Investors were betting that Democrat Joe Biden would become the next president but Republicans would retain control of the Senate, which would make it difficult for the Democrats to pass the larger fiscal spending they have been pushing.

As of Friday’s close, vote counting and trends suggested the Republicans were poised to retain control of the U.S. Senate, while the Democrats would hold a slimmed majority in the House of Representatives.

This outcome would likely weigh on demand for U.S. gasoline and distillates since it would likely mean the House and the Senate would have to reach a compromise on fiscal stimulus.

The dollar weakened because a smaller-than-expected fiscal stimulus package likely means the Fed would have to provide more monetary aid. A weak dollar could drive up foreign demand for dollar-denominated U.S. oil, but this would be a stretch if rising COVID-19 cases in Europe drive down demand.

Bearish Factors

Big Worries Over Demand in Europe

Helping to drive the market lower were worries about demand destruction due to the rapidly rising number of COVID-19 cases around the world. On Thursday, the European Union’s executive commission lowered its economic forecast, adding that the economy would not rebound to pre-virus levels until 2023.

Additionally, European Central Bank (ECB) Vice-President Luis de Guindos said on Friday that Euro Zone growth will likely be negative in the fourth quarter, as countries have imposed new restrictions to the economic activity over the past weeks in a bid to slow the coronavirus contagion.

The European Commission downgraded its GDP forecast expectations for 2020 and 2021 because of the second wave of infections.

Meanwhile, Italy recorded its highest daily number of infections on Thursday and cases surged by at least 120, 276 in the United States, the second consecutive daily record as the outbreak spreads across the country.

Weekly Forecast

The winner of the presidential election is no longer a guess. Biden won, but President Trump will try to tie up the results in court. Biden will take office in January.

With Biden’s win, the U.S. Dollar is expected to remain under pressure, not only because of fiscal stimulus, but because the Fed is expected to try to keep the economy moving forward while the politicians debate the size of the stimulus package. This could help offset some of the demand lost from the rapidly spreading coronavirus.

The most important factors driving the price action at this time are COVID-related restrictions and growing expectations that OPEC and its allies would postpone bringing back 2 million bpd of supply in January given demand has been sapped by new COVID-19 lockdowns.

The charts indicate the downside could be limited because of a major support zone and the upside could be limited because any bullish moves by OPEC+ will likely be offset by a COVID-related issue. This could lead to a rangebound trade over the near-term.

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