Oil Price Fundamental Weekly Forecast – US WTI’s Big Discount to International Benchmark Brent is Supportive

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed higher last week, as a U.S. inventory drop and fading hopes for an OPEC+ supply boost, offset concerns over a recession and a subsequent drop in demand.

Last week, September WTI crude oil settled at $98.62, up $3.92 or +4.14% and December Brent crude oil finished at $99.62, up $5.58 or +5.93%.

Slow Start to Bullish Week

Oil prices reversed early gains and settled lower on Tuesday, as investors worried about lower consumer confidence and braced for another 20 million barrels of crude oil to be released from the U.S. Strategic Petroleum Reserve (SPR).

The Biden administration said it will sell an additional 20 million barrels of SPR crude oil as part of a previous plan to tap the facility to calm oil prices boosted by Russia’s invasion of Ukraine in February and recovery in demand that cratered early in the pandemic. In late March, the administration said it would release a record 1 million barrels per day of SPR crude oil for six months.

In other news, U.S. consumer confidence dropped to nearly a 1-1/2-year low in July on nagging worries about inflation and rising interest rates, a Conference Board survey showed. It also showed consumers were less optimistic about the labor market.

Prices Rise on US Inventory Drop, Russia Gas Cuts

Oil prices jumped on Wednesday as a report of lower inventories in the United States and cuts in Russian gas flows to Europe offset concern about weaker demand and a U.S. interest rate hike.

U.S. crude oil stockpiles dropped 4.5 million barrels the week-ending July 22 as exports surged to an all-time high due to U.S. crude’s big discount to international benchmark Brent, the Energy Information Administration said.

Additionally, after a sharp drop in the last two weeks, U.S. gasoline demand rebounded by 8.5% week on week, according to the data.

OPEC+ Expected to Hold Production Steady

The next meeting of the Organization of the Petroleum Exporting Countries and allies including Russia, together called OPEC+, is set for August 3 and will be closely watched as their current output pact expires in September and the United States has stepped up calls for more production.

“OPEC and the U.S. in general would like to continue boosting production in the near term, but there are limits to the pace of increase and it is likely that production growth will be faster than market expectations,” said DBS Bank analyst Suvro Sarkar.

GDP Contraction Raises Recession Risks, Demand Drop

The U.S. economy unexpectedly contracted in the second quarter, with consumer spending growing at its slowest pace in two years and business spending declining, raising the risk that the economy was on the cusp of a recession.

After the report was released, a Reuters poll showed on Friday that a rally in oil prices could stall as recession fears and COVID flare-ups in China slow demand and counter supply risks from sanctions on Russia and OPEC+ output constraints.

Weekly Outlook

Economic data this week will reveal more clues as to whether the economy is headed into a recession. On Monday, the key report is ISM Manufacturing PMI. Tuesday, traders will be eyeing the JOLTS Job Openings report will be released. On Wednesday, the key report will be ISM Services PMI.

On Friday, traders will get the opportunity to react to reports on Average Hourly Earnings, Non-Farm Employment Change and the Unemployment Rate.

Traders will also be focusing on the weaker U.S. Dollar, which could drive up foreign demand especially because of U.S. crude’s big discount to international benchmark Brent. U.S. exports recently reached an all-time high and could continue to climb, offsetting any worries about a recession and lower demand.