Oil Price Forecast: China’s Sluggish Recovery Dampens Oil Price Optimism

Highlights

• Oil prices decline due to China’s dwindling demand.
• WTI forecasted between $75-$85 in upcoming weeks.
• U.S. crude production set to hit record by 2023.

Overview

Oil prices are lower in the Asian markets on Wednesday, primarily due to growing concerns over China’s decreased demand – the world’s top crude importer. The descent in demand is being attributed to the disheartening trade and inflation data from China, which seems to overshadow the market optimism around tightened supplies following production cuts from major exporters such as Saudi Arabia and Russia.

At 05:17 GMT, Light Crude Oil futures are trading $79.46, down $0.07 or -0.09%. The U.S. benchmark posted an approximate $1 gain the previous session.

Market Facing Headwinds

However, the trading action so far this week suggests that oil prices might find it challenging to ascend further. This sentiment stems from worries regarding a slow-paced recovery in China’s economy combined with looming concerns about decelerated demand in the U.S. and Europe due to prospective interest rate hikes. Forecasts suggest that WTI might oscillate between $75 to $85 a barrel in the upcoming weeks.

Signs of a Slowdown in China

Backing these concerns, recent Chinese data indicated a drop in the consumer price index for July, the first annual decline since February 2021. This suggests China’s tentative economic recovery post-pandemic is slowing down. Further amplifying these concerns is data that portrays an 18.8% monthly decrease in China’s crude oil imports for July. This marks the lowest daily rate since January, attributable to significant export reductions and rising domestic stocks.

Mixed Future Supply/Demand Situation

In contrast to the bearish trends, the benchmarks marked their sixth consecutive weekly gains last week. This was propelled by reduced OPEC+ supplies and anticipated Chinese economic stimulus aimed at enhancing oil demand recovery. Additionally, the U.S. Energy Information Administration’s (EIA) report highlighted an anticipated rise in U.S. crude oil production to a record 12.76 million bpd by 2023.

Short-term Outlook:  Slowing Momentum

Despite the extended production cuts by major players like Saudi Arabia and a general uptick in global demand, oil markets seem bearish. The primary influencing factor remains China’s slowing demand, casting a shadow over the optimistic supply cut measures. The immediate future might witness steady or slightly declining oil prices.

Technical Analysis

The current 4-hour price of Crude Oil stands at $82.74, a slight decrease from the previous 4-hour close of $82.82. When analyzing the moving averages, the current price is above the 200-4H moving average of $75.55, indicating bullish momentum. Conversely, the price is slightly above the 50-4H moving average of $81.36, reinforcing the bullish sentiment. The 14-4H RSI registers at 57.95, suggesting a moderately strong momentum.

In terms of support and resistance levels, the market is well above support at $79.05 to $78.29, while testing the main resistance area at $81.73 to $83.63.

Although the market has been struggle with the resistance area this week, the sentiment is still bullish on the 4-hour chart.  This scenario could change, however, if the 50-4H moving average fails as support.