Oil Price Fundamental Weekly Forecast – Traders Looking to Sell Rallies Until Demand Returns

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed lower last week and posted their biggest weekly decline since June as fears of a slow economic recovery from the COVID-19 pandemic compounded worries about weak oil demand.

After a mostly steady trade early in the week, sellers started to take control after a government report showed a drop in domestic gasoline demand. The selling pressure increased after a report concluded that China would limit its buying in September. Another report later in the week said middle distillate inventories at Asia’s Singapore oil hub have surpassed a nine-year high.

The week ended with prices pressured by extended declines in the U.S. equities market and by a report showing U.S. job growth slowed further in August as financial assistance from the government ran out.

Last week, October WTI crude oil settled at $39.77, down $3.20 or -7.45% and December Brent crude oil finished at $43.18, down $3.07 or -7.11%.

Oil prices took a hit on Thursday and is vulnerable to further downside pressure this week after a weekly government report highlighted weak U.S. gasoline demand data.

On Wednesday, the U.S. Energy Information Administration (EIA) data showed domestic gasoline demand during the week-ending August 28 fell to 8.78 million barrels per day (bpd) from 9.16 million bpd a week earlier. Consumption of other products also fell.

Late in the week, prices were further pressured by a report from Refinitiv that suggested the crude oil that had been flooding into China in recent months will probably ease back to more normal levels from October onwards.

Finally prices extended their declines on Friday amid a plunge in the U.S. equities market and a report that showed U.S. job growth slowed further in August as financial assistance from the government ran out.

Weekly Forecast

It’s going to be hard to generate demand out of thin air so we expect prices to remain under pressure this week. If there is a rally, it is likely to be fueled by short-covering and probably designed to set up the next short opening.

Our work indicates that the selling was mostly fueled by small speculator liquidation since the major hedge funds and managed futures accounts have been mostly participating in the products and not crude oil. We could see more volatility to the downside if the hedge funds decide to turn bearish crude oil. However, don’t expect them to sell weakness. They’ll be looking at selling a rally.

I don’t think we’ll form a meaningful bottom until U.S. policymakers approve a number stimulus plan. A long-term bottom? Not likely until the COVID-19 numbers start to improve or a successful vaccine is created, tested, approved and administered.

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