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

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.
James Hyerczyk
WTI and Brent Crude Oil

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.

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All

Top Promotions

Top Brokers

IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US