Oil Price Fundamental Weekly Forecast – Next Major Move Hinges on This Week’s US-China Trade Talks

U.S. West Texas Intermediate and international benchmark Brent crude oil futures settled lower last week. Most of the pressure came from selling encouraged by weak GDP data from China and a bearish outlook for the global economy by the International Monetary Fund (IMF). Rising U.S. production also weighed on prices.

Last week, March WTI crude oil settled at $53.69, down $0.35 or -0.65%. March Brent crude oil finished at $61.64, down $1.06 or -1.72%.

Underpinning the market were the OPEC-led production cuts. The cartel along with its ally Russia have been reducing output by 1.2 million barrels per day since January 1 in an effort to trim the excess global supply and reduce prices. Late in the week, the market was underpinned by worries about supply disruptions due to economic and political turmoil in Venezuela.

Global Economic Slowdown

WTI and Brent crude oil were pressured early in the week after China announced that its official economic growth came in at 6.6 percent in 2018, the slowest pace since 1990. Fourth-quarter GDP growth was 6.4 percent, a sign the economy is decelerating.

Shortly thereafter, an announcement from the International Monetary Fund (IMF) further weakened crude oil as it raised issues over future demand when it cut its global growth forecast for 2019 to 3.5 percent from 3.7 percent. Speaking at the World Economic Forum in Davos, Switzerland, IMF Managing Director Christine Lagarde said the move was due to the high level of economic risks that are accelerating around the globe. These include the U.S-China trade war, Brexit and China’s slowing economy.

A dovish outlook from the Bank of Japan and the European Central Bank also weighed on prices.

Rising U.S. Production and Fuel Inventories

According to the EIA, U.S. crude inventories surprisingly surged last week. The data showed that crude oil inventories rose by 7.97 million barrels during the week-ending January 18. Traders were looking for a draw of about 200,000.

Gasoline inventories also rose by 4.05 million barrels versus a forecast for a build of 2.66 million barrels. This was the eighth consecutive week of increases. Distillate stockpiles decreased by 0.62 million barrels, compared to estimates for a decline of 0.23 million.

Supply Disruption Concerns

Crude oil futures closed higher on Friday amid concerns that the political turmoil in Venezuela could lead to a disruption in supply. According to reports on Thursday, the Trump administration signaled it could impose sanctions on Venezuela’s crude exports. This is potentially bullish for crude oil prices because it comes on top of the sanctions against Iran that have already limited supply, However, some traders believe it could take months before the U.S. implements any sanctions against the nation.

Forecast

Since the U.S.-China trade dispute is sharing the blame for the slowing global economy and forecasts for lower demand, this week’s U.S.-China high level trade talks will take on added importance. The meetings will be held in Washington on January 30-31. Both sides have already offered concessions, but the major sticking points include protection of intellectual property and how to police any agreement.

With U.S. production rising almost as much as the OPEC-led cuts, a severe global economic slowdown will be bearish for crude because of lower demand.

Potential sanctions on Venezuela are a wildcard because no one is sure if or when they will take place.

Anything positive from the trade talks is likely to be supportive for crude oil prices.