Oil Price Forecast: China’s Economic Woes, Fed Rate Hike Speculation Cap Gains

Highlights

• Oil futures stable despite concerns over China’s economic recovery and potential rate hikes.
• Disappointing Chinese economic data adds downward pressure on oil prices.
• Unexpected rise in U.S. crude oil stocks and weak driving season impact market sentiment.

Outlook

U.S. West Texas Intermediate crude oil is rebounding on Thursday after experiencing an earlier setback. However, concerns over a sluggish economic recovery in China, the world’s leading oil importer, continued to cast a shadow on oil prices. Yesterday, the U.S. benchmark suffered a 1.5% decline following the U.S. Federal Reserve’s indication of potential rate hikes this year. The fear of an interest rate-driven economic slowdown and reduced oil demand weighed heavily on investor sentiment.

China’s Economic Data Disappoints

China’s economic data released on Thursday further fueled apprehensions about oil demand. Industrial output in May grew by a modest 3.5%, down from April’s expansion of 5.6% and below analysts’ expectations of a 3.6% increase. The manufacturing sector faced challenges due to weak domestic and offshore demand. Additionally, retail sales, an important indicator of consumer confidence, rose by 12.7%, falling short of the projected 13.6% growth and decelerating from April’s 18.4% increase. These disappointing figures from China contributed to the downward pressure on oil prices.

Unexpected Rise in US Crude Oil Stocks

China’s post-COVID recovery has been rocky, shattering any hopes of a rapid rebound in global oil demand. Furthermore, U.S. crude oil stocks experienced an unexpected rise of approximately 8 million barrels in the week ending June 9, according to the Energy Information Administration. Analysts had initially anticipated a decline of 500,000 barrels. Gasoline and diesel stocks also exceeded expectations. These inventory buildups indicate subdued demand for oil in the United States.

Increased Global Borrowing Costs Weigh

The weak start to the driving season in the U.S. and the continuous increase in visible global oil inventories further dampen optimism in the market. Adding to the concerns, the European Central Bank is poised to raise borrowing costs to their highest level in 22 years, with the possibility of further hikes in the future. Similarly, the Bank of England, in its battle against inflation, is expected to continue raising interest rates, as indicated by a Reuters poll of economists.

Short-Term Outlook:  Cautious Sentiment

In conclusion, U.S. West Texas Intermediate crude oil futures managed to recover slightly after a previous setback. However, lingering worries regarding the slow economic recovery in China, coupled with the U.S. Federal Reserve’s hints of potential rate hikes, continue to exert downward pressure on oil prices. Disappointing Chinese economic data and unexpected increases in U.S. crude oil stocks further contribute to the cautious sentiment in the market. The global oil industry faces challenges as it grapples with uncertain demand dynamics and the possibility of tighter monetary policies from central banks.

Technical Analysis

WTI Oil is edging higher on Thursday despite a failed attempt to overtake the $69.97 (PIVOT) the previous session. This has put the market in a weak position.

The inability to overcome $69.97 indicates that sellers are still in control. This could create the downside momentum needed to extend the selling into the next major target at $63.82 (S1) over the near-term.

Retaking $69.97 will stabilize the market after a steep sell-off on Wednesday. If the move is able to generate enough upside momentum then look for a near-term surge into $73.26.

This week’s price action indicates that sentiment is still bearish and that traders are in the “sell the rally” mode.

Resistance & Support Levels