Oil Price Fundamental Weekly Forecast – Demand Worries Capping Prices

James Hyerczyk
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U.S. West Texas Intermediate and international-benchmark Brent crude oil settled lower last week after touching lows not seen since early December. The move was further proof that the Middle East tension premium had been removed from the market. After hitting their lows for the week, buyers stepped in to stop the price slide and the markets nearly closed higher. The move suggests crude oil may have hit a value area on the charts.

While some support is being generated from the signing of the U.S.-China trade deal, the OPEC+ production cuts and a bigger than expected weekly inventory draw, perhaps keeping a lid on prices is a report from the International Energy Agency (IEA) that said it expected oil production to outstrip demand.

Last week, March WTI crude oil settled at $58.58, down $0.41 or -0.70% and March Brent crude oil finished at $64.85, down $0.13 or -0.20%.

In addition to the fundamental developments, technical factors also contributed to last week’s recovery with the market finding support following a test of a key 50% levels on the daily chart.

Last week, numerous factors contributed to the sluggish price action. There was no particular theme in the data releases, which leads us to believe prices will remain rangebound over the near-term unless there is another escalation of tensions in the Middle East.

Weekly U.S. Energy Information Administration Weekly Inventories Report

On Wednesday, the U.S. Energy Information Administration (EIA) reported that oil inventories fell by 2.5 million barrels during the week-ending January 10. Traders were looking for a draw of 500,000 barrels. Inventory now stands at 428.5 million barrels.

Despite the larger than estimated draw, the report was perceived as bearish because of a huge build in products. U.S. gasoline stocks rose by 6.7 million barrels in the week to 258.3 million barrels, the EIA said, compared with analysts’ expectations in a Reuters poll for a 3.4 million-barrel rise.

Distillate stockpiles rose by 8.2 million barrels in the week to 147.2 million barrels, versus expectations for a 1.2 million-barrel rise, the EIA data showed.

Finally, crude stocks at the Cushing, Oklahoma futures delivery hub rose by 342,000 barrels in the last week, the EIA said.

U.S.-China Ink Phase One Trade Deal

Under the Phase One trade deal, China committed to buy over $50 billion more of U.S. crude oil, liquefied natural gas and other energy products over two years.

IEA Offers Bearish View

The International Energy Agency offered a bearish view of the oil market outlook for 2020.

OPEC supply will exceed demand for its crude, the IEA forecast, even if OPEC member states comply fully with output cuts agreed with Russia and other producers in a grouping known as OPEC+.

OPEC also thinks that supply will exceed demand because of increasing non-OPEC supply growth.

Mixed Data from China Weighs on Demand

China, the world’s biggest crude importer, raised concerns about fuel demand when an economic report confirmed sluggish economic growth. The world’s second-largest economy grew by 6.1% in 2019, its slowest expansion in 29 years, government data showed on Friday.

Surging Chinese demand as seen in refinery throughput figures offset the less positive economic growth data. In 2019, Chinese refineries processed 651.98 million tonnes of crude oil, equal to a record high 13.04 million barrels per day, and up 7.6% from 2018, government data showed. Throughput also set a monthly record for December.

Weekly Forecast

With prices returning to their early December levels, we could see more rangebound trading now that the trade deal is in the books and there has been a de-escalation of tensions between the United States and Iran.

Fears of lower demand due to a sluggish global economy may keep a lid on prices, but OPEC Secretary-General Mohammed Barkindo sees demand growth as “robust”, which could lead to an upside surprise over the course of 2020 as trade tensions subside.

“By and large what we see from our side is an upside potential of growth from the demand side of the equation, which will affect the total balance for the rest of the year,” he said. “We are hoping that some of the challenges that we’re facing in terms of international trade will be addressed.”

I see a rangebound trade until the hedge funds can find a story they can latch onto – bullish or bearish. Right now, there are few exciting developments.

This article was originally posted on FX Empire

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