Oil Price Fundamental Weekly Forecast – Traders Weighing Covid Concerns Against Weak Dollar Demand Increase

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures reached four-month highs last week before struggling to hold on their gains.

The market took on a bullish tone early in the week when the European Union announced the approval of a massive recovery fund to help Euro Zone economies devastated by the coronavirus. The ensuing rally was responsible for nearly all of the market’s gains this week.

The EU news was so bullish that it encouraged traders to ignore a surprise build in U.S. crude oil inventories and worries that a surge in U.S. coronavirus cases could cap fuel demand. However, ahead of the weekend, it looked as if these factors were weighing on prices, creating a weaker tone that could extend into this week.

Helping to weigh on prices late in the week was the announcement that China ordered the United States to close its consulate in the city of Chengdu on Friday, responding to a U.S. demand this week that China close its Houston consulate, as relations between the world’s worsened.

Bullish crude oil traders are hoping this “tit for tat” relationship between the United States and China is over for now with both accomplishing nothing by closing their counterpart consulates.

If the U.S. and China spat is neutralized for now, crude oil traders can go back to what they do best, react to the supply and demand data.

Supply should have been a major issue last week when the U.S. released a weekly inventories report that showed another surge in crude inventory and continuing weakness in gasoline and distillate demand.

Starting on August 1, OPEC+ will begin tapering production cuts. This could develop into something bearish as the week progresses because it will come at a time when demand is expected to take a hit. Although not particularly bearish right now (well maybe on paper), this event could help trim prices a little, but nothing like we saw in March, April and May.

Traders will be monitoring the supply situation this week, but they will be keeping an even closer eye on the demand outlook as the U.S. struggles to gain control of a second-wave of coronavirus cases.

As the number of cases rise, the biggest worry will be unemployment. Last week’s initial claims data showed an increase in the number of first time filers. If this trend continues, it is going to be difficult to see where the gasoline demand will be coming from if fewer people are driving to work. Furthermore, more consumers are likely to do stay at home shopping as they ride out the spread of the virus; this is likely to keep a lid on demand.

Last week’s airline industry earnings reports were extremely bearish and the outlook even worse. This news should continue to weigh on distillate fuels which should lead to lower crude demand.

Finally, there is a ray of hope for bullish traders, but it comes at the expense of a weaker U.S. Dollar. Last week, the dollar plunged against a basket of currencies to a 2-year low. Since crude oil is dollar-denominated, we could see an uptick in exports due to increased foreign demand. This could be just enough to support the market against a drop in demand due to COVID-19.

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