Oil Price Fundamental Weekly Forecast – Low Demand Remains Key Issue after China Output Plunges

Lower demand for risky assets and commodities is helping to drive down U.S. West Texas Intermediate and international-benchmark Brent crude oil futures on Monday. Aggressive moves by major central banks to provide liquidity to their respective economies failed to ease tensions over the coronavirus pandemic and may actually be having a negative effect on the markets since the decisions are being perceived as “panic” moves.

At 11:02 GMT, May WTI crude oil is trading $30.06, down $2.05 or -6.38% and June Brent crude oil is at $32.45, down $2.99 or -8.44%.

Furthermore, China’s factory output plunged at the sharpest pace in 30 years amid of the spread of coronavirus. This is likely an indication of what to expect from European and U.S. factory production over the next several months. Therefore, low crude oil demand is going to be a major issue for a long time.

Major Central Banks Make Moves to Combat Economic Fallout of the Pandemic

The Fed on Sunday cut its key rate to near zero. This prompted the Reserve Bank of New Zealand to cut its Official Cash Rate to 0.25 percent, its lowest level in history. Meanwhile, the Bank of Japan later stepped in by easing monetary policy further in an emergency meeting.

The big takeaway from these moves is that they failed to calm investors.

Chinese Economic Data

China’s industrial output fell by a much larger than expected 13.5% in January-February from the same period a year earlier, the weakest reading since January 1990 when Reuters records began.

This is significant because the virus became an issue in Europe and the U.S. starting in February – March. So there is further weakness to come.

Other News

Brent’s premium to WTI is close to its narrowest since 2016, making U.S. crude oil uncompetitive in international markets. The tightness reflects expectations of low demand in Europe.

“The relative weakness in Brent shouldn’t come as too much of a surprise, given the severity of the breakout across Europe,” said ING analyst Warren Patterson.

Surprisingly, the U.S. oil drilling rig count rose for a second week in a row despite a massive drop in both oil and natural gas prices last week and projections by many analysts that the number of rigs will fall as producers deepen their spending cuts on new drilling.

Companies added one oil rig in the week to March 13, bringing the total count to 683, their highest since December, energy services firm Baker Hughes Co. said in its closely followed report on Friday. That is down 18% from the same week a year ago when 833 rigs were active.