Oil Price Fundamental Weekly Forecast – Expect Lower Demand Growth as US-China Trade War Escalates

U.S. West Texas Intermediate and international-benchmark crude oil futures settled mixed last week. Early in the week, the markets were pressing a one week high, but sellers started to arrive mid-week after the release of a bearish government inventories report. On Thursday, the selling was fueled by hawkish comments from a Fed official, and on Friday, the markets tumbled in reaction to an escalation of the trade war between the United States and China, which increased the chances of a U.S. recession.

Last week, October West Texas Intermediate crude oil futures settled at $54.17, down $0.64 or -1.17% and December Brent crude oil futures finished at $58.16, up $0.49 or +0.84%.

EIA Crude Numbers Supportive, but Product Inventories Bearish

For a number of weeks, declining crude oil inventory has helped prop up prices. Crude stockpiles decreased 2.7 million barrels during the week-ending August 16, a bigger drawdown that the 1.9 million barrels.

While another drop in crude inventory was supportive this week, these gains were erased by a rise in refined product inventories. The EIA report showed bigger-than-expected builds in U.S. fuel inventories for the week-ending August 16. Gasoline stocks rose by 312,000 barrels, while distillate supplies grew by 2.6 million barrels.

“It looks like gasoline demand has peaked for the season, and will only trend lower from here,” said John Kilduff, partner at energy hedge fund Again Capital Management in New York.

Fedspeak Bearish

Crude oil prices further weakened on Thursday after Philadelphia Fed President Patrick Harker said that while he went along with the central bank’s rate cut in July, he doesn’t see the case for additional stimulus. His comments came as a surprise because many crude traders were hoping for more stimulus from the Fed starting in September.

Dovish Fed Chair Powell Provides Some Support

In a highly anticipated speech on Friday, Federal Reserve Chairman told global investors the Fed is prepared to act to sustain the more than ten year recovery. Powell said the Fed stands ready to do whatever it takes to support the record-long U.S. economic expansion, while stating that international developments are weighing most heavily on the Fed’s decisions.

Prices Sink after China Imposes New Tariffs; Trump Creates Market Turmoil

Trading conditions changed abruptly on Friday when China announced it will impose new tariffs on $75 billion worth of U.S. goods and resume duties on American autos. The announcement caught traders off-guard and they responded in textbook fashion by buying safe-haven Treasury bonds, Japanese Yen and gold, while selling higher-yielding assets like crude oil.

After China retaliated with fresh tariffs and Fed Chairman Jerome Powell calmed the markets by seemingly opening the door to further rate cuts by saying the central bank stands ready to do what is necessary to support the record-long U.S. expansion on Friday, President Trump lit up the Twitterverse with a series of scathing tweets criticizing the Fed, Jerome Powell and China. But this time, he didn’t stop there, he took action that triggered a steep break in the stock market and crude oil, while spiking demand for safe-haven assets.

In retaliation, Trump said he was ordering U.S. companies to look at ways to close operations in China and make more of their products in the United States instead.

Simmering Middle East Tensions Still Supportive

Continuing to provide support are the OPEC-led production cuts and brewing worries in the Middle East. Rising U.S. production, however, is coming close to off-setting the cuts in output although there is talk of a future reduction of OPEC production.

Last week, Iranian President Hassan Rouhani cautioned Washington against tightening pressure on Tehran. In a veiled threat, Rouhani said on Wednesday, if Iran’s oil exports are cut to zero, international waterways will not have the same security as before. Iranian Foreign Minister Mohammad Javad Zarif said Tehran might act “unpredictably” in response to U.S. policies under President Donald Trump.

Weekly Forecast

Last week’s price action indicates that crude oil traders are not too worried about Fed policy after Powell’s reassurance that the Fed will take action to keep the economy moving forward and to prevent a global recession.

The biggest concern for traders is the escalation of the U.S.-China trade dispute that will likely lead to further downward revisions in U.S. and global oil demand growth.