Oil Price Fundamental Weekly Forecast – Traders Eyeing Russia’s Response to Output Cut Extension

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures finished on their highs last week after President Trump lifted an important hurdle that would’ve had a negative effect on future demand. Crude oil posted hefty gains in May and for the week thanks to production cuts and optimism over Chinese-led demand recovery.

July WTI posted a record monthly gain of 62.43% in May that would represent its strongest monthly rise since March 1999, Reuters said.

Last week, July WTI crude oil settled at $35.49, up $2.24 or +6.74% and August Brent crude oil finished at $37.84, up $2.18 or +5.76%.

Traders Facing Headwinds

There are headwinds, however, that could stall or even bring an end to the current rally. These headwinds include possible U.S. sanctions against China over its treatment of Hong Kong, Russia’s lack of participation in an extension of the OPEC+ production cuts, and weak U.S. demand. Traders are also monitoring a possible second wave of the coronavirus in South Korea.

Trump Eases Concerns over China

Crude oil futures jumped late in the session on Friday as investors breathed a sigh of relief after President Donald Trump signaled no changes to the trade deal with China despite rising tensions.

During a much-awaited news conference, Trump said he would take action to eliminate special treatment towards Hong Kong. However, he did not indicate the U.S. would pull out of the phase one trade agreement reached with China earlier this year, easing trader concerns for the time being.

Russia’s Commitment to OPEC+ Supply Cuts Extension Major Concern

On the demand front, traders are becoming a little worried about Russia’s commitment to deeper than agreed upon oil production cuts ahead of a June 9 meeting of the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+.

Earlier in the week, Russian Energy Minister Alexander Novak met with domestic major oil companies to discuss the implementation of global oil production curbs and the possible extension of the current level of cuts beyond June, sources familiar with the plans told Reuters.

This news actually comes as no surprise. Often ahead of an important OPEC+ meeting, traders question Russia’s commitment to any proposed deal. Historically, Russia has been the last major producer to approve production cuts.

Signs of Weak US Fuel Demand

Thursday’s data from the Energy Information Administration (EIA) showed that U.S. crude oil and distillate inventories rose sharply last week. Fuel demand remained slack even as various states lifted travel restrictions they had imposed to curb the coronavirus pandemic, analysts said.

Weekly Forecast

The biggest issue that crude oil traders could face over the near-term will be the impact of China’s response to President Trump’s comments on Friday. Will China retaliate, or will they just sit back and wait? What are they waiting for? They are betting that Trump will lose the election and they’ll be able to do whatever they want because he can’t do anything about it. China wants to get its economy back on track so they won’t do anything drastic that could derail its recovery, but they could renege on Phase One of the trade deal.

Steep sanctions by the U.S. and equally severe retaliation by China could create similar conditions to a trade war. This won’t be good for the global economy especially at a time when it’s just starting to recover from the damage cause by the coronavirus pandemic.

On the positive side, traders shouldn’t worry about Russia’s participation in an extension of the production cuts. There is just too much evidence supporting their positive influence on prices. Expect Russia to approve an extension.

Furthermore, although U.S. inventories rose last week, storage in Cushing, Oklahoma, the main delivery point in WTI, decreased by 3.4 million barrels, and refinery utilization also rose 71% from 69%. All the EIA report told us is that changes are going to be gradual.

The wildcard over the next few months is going to be a second-wave of coronavirus outbreaks. South Korea is going back to strict restrictions. The CDC is warning about a second wave. The U.S. economy will be hit hard if there is a resurgence with the re-opening of the economy moving slower than anticipated.

Technically, July WTI Crude oil traders face a big wall of possible resistance at $36.07 to $40.50. Trader reaction to this zone could set the near-term tone.

For a look at all of today’s economic events, check out our economic calendar.