Oil Price Fundamental Weekly Forecast – It’s Demand Worries Versus OPEC Production Cuts

U.S. West Texas Intermediate and international-benchmark Brent crude oil finished lower last with the former getting hit the hardest due to heightened volatility associated with an escalation of tensions between the United States and China.

This current elevated tensions actually carried over from the week before when President Trump announced new tariffs against China. Concerns jumped early last week when China retaliated by dropping its currency below the psychological 7 yuan to the dollar level and canceling all agricultural deals it had with the United States.

Later in the week, worries over a slowing economy then prompted the Reserve Bank of New Zealand to shock the markets with a 50-basis point rate cut in its official cash rate. This drove global bond yields sharply lower, while triggering fears over a global recession.

Worries about a recession increased the chances of lower crude oil demand, driving prices sharply lower. That steep break pushed prices to multi-month lows, but since that initial bearish reaction, the market has recovered more than half its losses on reports that OPEC would cut production to support prices.

Barring any further bearish developments between the U.S. and China, the news of an OPEC production cut could provide short-term support.

For the week, September WTI crude oil settled at $54.50, down $1.16 or -2.08% and October Brent crude oil finished at $58.53, down $3.36 or -5.74%.

U.S. Energy Information Administration Weekly Inventories Report

On August 7, the U.S. Energy Information Administration (EIA) reported a build of 2.4 million barrels in U.S. stockpiles versus analyst estimates of a 2.8 million draw. U.S. crude oil inventories are about 2% above the five-year average for this time of year.

Gasoline inventories rose 4.4 million barrels, with U.S. Gulf Coast gasoline stocks hitting the highest on record for this time of year, the EIA data showed.

Earlier in the week, the EIA reduced its forecast for U.S. demand for crude and liquid fuels. The agency also cut its forecast for global crude and liquids consumption by 0.1% for both 2019 and 2020.

Meanwhile, U.S. crude production was set to rise 1.28 million bpd to 12.27 million bpd this year.

IEA Cuts Demand Growth Forecast

On August 9, the International Energy Agency (IEA) cut its global oil demand growth forecasts for this year, citing fears of an economic downturn. The energy agency now expects oil demand growth to reach 1.1 million barrels per day (b/d) in 2019 and 1.3 million b/d in 2020. That constitutes a downward revision of 100,000 b/d for this year and 50,000 b/d for next year.

In its closely-watched monthly oil report, the IEA said there was “growing evidence of an economic slowdown” with many large economies reporting weak gross domestic product (GDP) growth in the first half of the year.

“The situation is becoming even more uncertain,” the IEA said, before describing global demand growth in the first half of the year as “very sluggish.”

“Meanwhile, the prospects for a political agreement between China and the United States on trade have worsened. This could lead to reduced trade activity and less oil demand growth.”

Looking ahead, the IEA said the outlook for oil demand growth is “fragile,” with a greater likelihood of a downward revision than an upward one.

Weekly Forecast

Despite a number of potentially bearish events last week, WTI and Brent crude oil held up surprisingly well, in my opinion. The news that OPEC may cut production further seemed to breathe some air in the market. This is the event that could provide support for the market this week. Of course, as escalation of tensions between the U.S. and China could help cap gains or lead to another steep break, but you can’t trade scared. There are two sides to the market.

OPEC May Reduce Production

CNBC reported that Saudi Arabia plans to maintain its crude oil exports below 7 million barrels per day in August and September to bring the market back to balance and help absorb global oil inventories, a Saudi oil official said on August 7.

Additionally, the United Arab Emirates also will continue to support actions to balance the oil market, energy minister Suhail al-Mazrouei said in a tweet on August 8.

The minister said the OPEC and non-OPEC ministerial monitoring committee would meet in Abu Dhabi on September 12 to review the oil market.

Will China Cut U.S. Crude Purchases?

There is a wildcard out there. It’s China’s interest in U.S. oil. Recently data showed Chinese buyers renewed their interest in U.S. crude, as imports climbed to a nine-month high of 247,000 barrels per day, according to the Energy Information Administration (EIA).

This, however, may have been a goodwill gesture tied to the on-going trade negotiations. Because of the increasing tensions between the two countries, China may decide to dramatically reduce its intake of U.S. crude imports. This could trigger another steep break in prices.

Goldman Sachs Cuts U.S. Growth Forecast

At the end of last week, the news was balanced to bearish, which led to lower prices. This week, we’re going to see if expectations of OPEC production cuts will be enough to provide support.

Furthermore, Goldman Sachs cut its U.S. fourth-quarter growth forecast by 20 basis points to 1.8%, citing a larger than-expected impact of recent trade war events. This could be enough to put a lid on gains.