Oil Price Fundamental Weekly Forecast – Demand Worries Likely to Outweigh Optimism Over Vaccinations

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished at their highest levels since March last week as speculators shrugged off the negative headlines and focused on the possibility of an improvement in future demand due to the rollout of the coronavirus vaccines.

The vaccine news wasn’t the only factor driving prices higher. A plunge in the U.S. Dollar to a two-year low against a basket of currencies also led to increased foreign demand for dollar-denominated crude oil.

Last week, February WTI crude oil settled at $49.24, up $2.49 or +5.33% and February Brent crude oil finished at $52.26, up $2.29 or +4.38%.

On a positive note, the United States kicked off its vaccination campaign against COVID-19, buoying hopes that pandemic restrictions could end soon and lift demand at the world’s largest oil consumer.

Meanwhile, the lingering impact of the COVID-19 pandemic is hampering efforts by OPEC and its allies to support the market, leading OPEC to warn that the rebound in demand in 2021 will be slower than expected.

Demand will rise by 5.90 million barrels per day (bpd) next year to 95.89 million bpd, OPEC said in a monthly report. The growth forecast is 350,000 bpd less than expected a month ago.

The cartel has steadily lowered its 2021 demand growth forecast in recent months.

Another major crude oil group saw a similar development. The roll-out of vaccines this month to combat the coronavirus pandemic will not quickly reverse the destruction wrought on global oil demand, International Energy Agency (IEA) warned on Tuesday.

“The understandable euphoria around the start of vaccination programs partly explains higher prices but it will be several months before we reach a critical mass of vaccinated, economically active people and thus see an impact on oil demand,” the IEA said in its monthly report.

“In the meantime, the end of year holiday season will soon be upon us with the risk of another surge in COVID-19 cases and the possibility of yet more confinement measures.”

Weekly Forecast

Speculators can only take the market so far before reality sets in. The reality is the coronavirus is spreading faster than the vaccination process so we have to assume that conditions will get worse before they get better. This means more restrictions and lockdowns are likely, which should damage the demand outlook.

Meanwhile, OPEC+ has to decide whether they want to increase production by 500,000 barrels per day starting on January 1. If they are driven by the relatively higher prices then they will likely make the move. If they are concerned about low demand and oversupply then they will leave production at current levels.

The wildcard this week will be the U.S. Dollar. A weaker greenback provided an extra boost to the crude oil market last week. Therefore, we have to conclude that prices are likely to move lower if the dollar rebounds this week.