Crude Oil

Oil Price Fundamental Daily Forecast – Middle East Leaders Worried About China’s Slowing Demand

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading slightly lower early Wednesday after yesterday’s roller-coaster ride that drove prices to their highest levels of the year.

At 0820 GMT, October WTI Crude Oil futures are trading $69.10, down $0.77 or -1.10% and November Brent Crude Oil futures are at $77.64, down $0.53 or -0.68%.

Oil prices jumped early Tuesday as traders took precautions ahead of potential supply disruptions due to a hurricane forecast for the upper U.S. Gulf Coast. According to reports two Gulf of Mexico oil platforms were evacuated in preparation for Tropical Storm Gordon. The storm was expected to become a hurricane before it makes landfall as a Category 1 hurricane near the Mississippi-Alabama border.

Prices moved lower later in the session due to technically overbought conditions. Some analysts also said that speculative buyers were way ahead of the actual event and that the direction of the storm is still unknown as well as what infrastructure, if any, will be impacted.

Also putting pressure on crude oil was a report from Genscape that said Cushing, Oklahoma, crude inventories rose nearly 754,000 barrels from August 24 to August 31.

Forecast

Tropical Storm Gordon is now moving ashore along the Mississippi/Alabama coastline while spreading heavy rain and gusty winds along the northern Gulf Coast. Based on this information, it looks as if the hurricane missed the key crude oil platforms in the Gulf so I don’t expect any supply disruptions. This should shift the focus back to the traditional supply/demand fundamentals.

Both WTI and Brent Crude Oil futures contracts are trading below last Friday’s close so the entire weather premium and then some has been wiped out.

The early weakness suggests investors have shifted their focus away from supply concerns, which drove up prices last week, to demand concerns. One issue bothering bullish traders is the risk of declining Chinese demand for oil. According to CNBC, Middle East officials are worrying more about China at this time than Iran’s supply curbs as a result of U.S. sanctions.

Bahrain and Oman’s oil and gas ministers both told CNBC Monday that China’s demand for oil could decline on the back of its trade dispute with the U.S. that has seen tariffs imposed on a wide range of Chinese imports.

“I think there is a risk on the demand side,” Bahrain’s Oil Minister Sheikh Mohammed bin Khalifa told CNBC’s Hadley Gamble in Muscat, Oman. “Is demand going to continue as strongly as it did?”

“Obviously the trade issue is going to impact demand in a negative fashion if it continues and persists. You’ve got the strong dollar, which is another factor.”

Oman’s Mohammed bin Hamad Al Rumhy said, “There is a danger that the demand will be impacted as well. People often focus on the supply side – what happens if Iran stops supplying – but what happens if China reduces its consumption? So we are looking at both sides of this discussion.”

“I see that as a possibility as well. If there is a serious trade disagreement between the U.S. and China, the Chinese consumption of energy will be impacted negatively, from our point of view and the ability to produce and export will be impacted,” he said at the World Heavy Oil Congress.

“And I think, and many people agree with me, that the demand will be impacted – so that’s not good for us.”

Demand concerns may drive the price action lower early Wednesday, but late in the session, the focus will shift to the weekly American Petroleum Institute’s weekly inventories report.

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James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.