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Oil Price Fundamental Weekly Forecast – Simmering US-China Tensions Emerge as Issue that Could Cap Gains

James Hyerczyk

U.S. West Texas Intermediate and international-benchmark crude oil futures finished higher last week, fueled by positive supply data and an optimistic outlook for demand now that countries have begun to ease coronavirus-related lockdowns and restrictions. Putting a lid on prices, however, were renewed concerns over U.S.-China relations.

Last week, July WTI crude oil settled at $33.25, up $3.73 or +12.64% and August Brent crude oil finished at $35.66, up $2.86 or +8.02%.

US Production Cuts Helped Trim Supply for a Second Week

The Energy Information Administration (EIA) reported Wednesday that U.S. crude inventories fell by 5 million barrels for the week-ended May 15, marking a second weekly decline in a row. That compared with a forecast by analysts polled by S&P Global Platts for an average increase of 2.4 million barrels.

The EIA data also showed crude stocks at the Cushing storage hub fell by about 5.5 million barrels for the week, easing concerns over tightening storage space.

Wednesday’s EIA report also showed that gasoline supply unexpectedly climbed by 2.8 million barrels, while distillate stockpiles rose 3.8 million barrels. Traders were looking for a supply decline of 3.5 million barrels for gasoline, while distillate stocks were forecast at 3.2 million barrels higher.

Escalating US – China Tensions Could Cap Gains

The end of the week weakness is being generated by profit-taking ahead of the long U.S. holiday weekend and escalating tensions between the United States and China. Some traders are also expressing concerns over the pace of demand recovery from the coronavirus crisis, but this is likely to become more of an issue next week once traders get data on U.S. Memorial Day holiday travel.

Prices reversed to the downside early Friday as the tensions between the U.S. and China centered on the former’s imposition of a new national security law on Hong Kong after months of anti-government protests in the Chinese-ruled city. Tensions between Beijing and Washington have risen in recent days, over issues such as the coronavirus pandemic as well as a bill that was passed which could force Chinese firms to delist on U.S. exchanges.

Adding to uncertainties, China refrained from setting a 2020 GDP growth target and pledged to step up spending and financing to support its economy, the first time that the Asian country did not set a gross domestic product (GDP) goal since 1990 when the government started to publish such targets, according to Reuters.

Baker Hughes Reports 10th Weekly Decline in US Oil-Rig Count

On Friday, U.S. Energy Services firm Baker Hughes reported that the number of active U.S. rigs drilling for oil dropped by 21 to 237 the week-ending May 22. The oil-rig count has now fallen for 10 weeks in a row, implying upcoming declines in domestic crude output. The total active U.S. rig count, meanwhile, also fell by 21 to 318, according to Baker Hughes.

This news is enough to underpin prices, but may not be enough to overcome the coronavirus demand destruction and rising tensions between China and the United States.

Weekly Forecast

Last week’s supply and demand data indicates that supply is being managed through compliance among OPEC+ members as well as U.S. production cuts. Demand is recovering in North Asia, particularly China, based on recent reports. And as Europe and the U.S. start to open up their economies, the demand should improve in those regions also.

However, the new wildcard is escalating U.S.-China tensions. At this time, the U.S. is challenging China on three fronts – coronavirus blame, stock market delisting for government controlled corporations and the threat of new tariffs if China interferes with Hong Kong’s government.

If the tensions between the two economic powerhouses continue to worsen over the near-term, then this could raise enough uncertainty to encourage crude oil traders to book profits and take to the sidelines on fresh worries over future demand.

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

This article was originally posted on FX Empire