WTI and Brent Crude Oil

Oil Price Fundamental Weekly Forecast – Easing Production Cuts, Falling Demand – Bad News for Bulls

U.S. West Texas Intermediate and Brent crude oil futures finished mixed last week as inventories rose and record-breaking new coronavirus cases in the United States stoked concern about the pace of economic recovery and fuel demand. Meanwhile, the International Energy Agency (IEA) raised its 2020 oil demand forecast, but also warned that the spread of COVID-19 posed a risk to the outlook.

That describes the current rally in a nutshell. Some people call it a “yeah, but…” rally because on one hand the OPEC+ production cuts are working to limit supply and the gradual reopening of the economy is helping to improve the demand picture, “yeah, but..” what about rising coronavirus cases in the United States and other countries and the possibility of another round of demand destruction?

Last week, August WTI crude oil settled at $40.55, down $0.10 or -0.25% and September Brent crude oil closed at $43.24, up $0.10 or +0.23%.

Jump in U.S. Crude Oil Inventories

The new worries about fuel demand surfaced just one day after data from the U.S. Energy Information Administration (EIA) showed U.S. gasoline stockpiles fell by 4.8 million barrels the week-ending July 3, much more than analysts expected, as demand hit its highest level since March 20.

Investors may start lightening up on the long side because they feel support will disappear after this week as coronavirus cases are surging in several U.S. states. A spike in coronavirus cases across several U.S. states raised the prospect of renewed lockdowns and other restrictions that would dent any sustained recovery in fuel demand.

Weekly Forecast

The question traders are asking themselves is: Will the rapidly rising COVID-19 in the United States affect demand enough to drive up crude oil and gasoline inventories?

This question won’t be answered until next week’s American Petroleum Institute (API) and Energy Information Administration (EIA) weekly storage reports are released.

In the meantime, there will be a lot of speculation and with that will come volatility and two-sided trading. At this time, traders seem to be following the lead of the equity market traders and shrugging off the coronavirus numbers, while maintaining their focus on a V-shaped recovery for the economy. But crude oil traders can’t hide behind the stock market rally for too long before reality finally sets in.

Big jumps in inventories next week will likely light the fuse for an eventual break back to $30.96 to $28.44 over the near-term, while steady to lower inventories readings may finally give traders the confidence needed to successfully overcome $41.25.

Finally, easing production cuts at a time when demand could drop could prove to be a disaster for crude oil.

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

Published by

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.