Oil Price Forecast: Bearish Sentiment Persists with Weaker Demand, Surplus Supply

Highlights

• U.S. crude oil inventories unexpectedly increased, causing market concerns.
• Growth in gasoline inventories adds to the negative sentiment.
• Decline in China’s manufacturing activity raises concerns about oil demand.

Overview

U.S. benchmark WTI crude oil is edging higher on Thursday after bouncing back from a third straight loss the previous session.

The decline was caused by data from private industry sources indicating an unexpectedly significant increase in U.S. crude oil inventories last week. This has raised concerns about too much supply in the market, especially due to indications of weaker demand from China.

At 05:21 GMT, WTI Oil is trading $68.329, up $0.625 or +0.92%. On Wednesday, the United States Oil Fund ETF (USO) settled at $60.61, down $1.69 or -2.71%.

US Oil Stockpiles Surge, Defying Forecasts

Last week, U.S. crude oil stockpiles increased by approximately 5.2 million barrels, as reported by market sources citing figures from the American Petroleum Institute (API) on Wednesday. This contradicted expectations from a Reuters poll, which anticipated a decrease of 1.4 million barrels.

Adding to the negative sentiment, gasoline inventories unexpectedly grew by around 1.9 million barrels during the week ending May 26, according to the data. This was in contrast to estimates of a drawdown of approximately 500,000 barrels.

Traders are now eagerly awaiting the release of government data on U.S. crude stocks, which is scheduled for later today at 15:00 GMT. The data was delayed by a day due to a U.S. holiday earlier this week.

China Manufacturing Decline Fuels Concerns

In May, manufacturing activity in China declined more quickly than anticipated, causing concerns among traders about the demand from the second-largest consumer of oil globally.

OPEC+ Meeting Sparks Uncertainty

Traders are closely monitoring the upcoming meeting of OPEC+ on June 4. OPEC, along with its allies such as Russia, has been sending mixed signals regarding the possibility of further production cuts. However, analysts from HSBC and Goldman Sachs have expressed their belief that no additional cuts will be announced at this meeting.

Surprising Labor Data Rattles Investors

Investors were unsettled by unexpectedly positive labor market data released on Wednesday. There are fears that the Federal Reserve might raise interest rates in June, which could potentially reduce fuel demand in the United States, the largest consumer of oil worldwide.

Progress Made on U.S. Debt Ceiling Bill

In the U.S., progress was made on a bill to suspend the government’s $31.4 trillion debt ceiling, avoiding a disastrous default. The bill successfully cleared a significant procedural hurdle in the House of Representatives on Wednesday, setting the stage for a vote on the bipartisan debt deal itself.

Short-Term Outlook:  Bearish

Based on the given data and factors impacting the crude oil market, the forecast leans towards a bearish outlook. Last week’s increase in U.S. crude oil stockpiles, contrary to expectations of a decrease, coupled with unexpected growth in gasoline inventories, has created a negative sentiment in the market.

Additionally, the faster-than-anticipated decline in manufacturing activity in China raises concerns about oil demand from the second-largest consumer. Traders are closely watching the upcoming OPEC+ meeting, but analysts from HSBC and Goldman Sachs do not expect further production cuts to be announced.

The unexpectedly positive labor market data, while unsettling for investors, has also raised fears of potential interest rate hikes by the Federal Reserve, which could potentially reduce fuel demand in the United States. However, progress in suspending the government’s debt ceiling has provided some stability.

Overall, the combination of these factors suggests a bearish sentiment in the crude oil market.

Technical Analysis

WTI Oil is currently trading on the weakside of $69.35 (PIVOT), making this level new resistance. A sustained move under this level will indicate the presence of sellers. If this creates enough downside momentum then look for the move to continue into $62.59 (S1).

Overtaking $69.35 (PIVOT) will signal the return of buyers. This move could create the momentum needed to challenge $75.04 (R1).

Resistance & Support Levels

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