Oil Price Forecast: Banking Concerns and US Interest Rate Hike Add Pressure to Oil Market

WTI Oil Highlights

• China’s manufacturing decline affects oil market.
• Positive spending during Labor Day may indicate economic recovery.
• US interest rate hike and banking concerns pressure oil market.

WTI Oil Overview

Crude oil traders are seeing U.S. benchmark West Texas Intermediate crude oil futures fall on Tuesday due to two factors. First, weak economic data from China is having a negative impact on prices. Second, traders are expecting the Federal Reserve to raise interest rates, which is also putting downward pressure on oil prices.

At 08:00 GMT, WTI Oil is trading $75.16, down $0.80 or -1.05%. On Monday, the United States Oil Fund ETF (USO) settled at $66.56, down $0.94 or -1.39%.

China’s Economic Uncertainty Pressures Oil Market

The oil market is currently facing pressure due to China’s uncertain economic recovery, which is making it difficult to predict fuel consumption demand. In April, China’s manufacturing activity unexpectedly declined, which was the first contraction since December according to official data. Although China’s economic recovery from the pandemic was expected to boost demand, weak manufacturing data is creating uncertainty in the market.

Positive Labor Day Sales Boost China’s Recovery Prospects

Despite the weak manufacturing data, analysts in an ANZ Research note pointed out some positive signs of recovery based on spending during the five-day Labor Day holiday. Major retail and catering companies in China have reported a significant jump of 21% in sales, based on Ministry of Commerce data.

Additionally, a record 19.7 million railway trips were made across the country, and local media predicts a 20% increase in traffic compared to 2019. CCTV reported that passenger travel on the first day of the holiday surged 151.8% from the same day last year, while the number of air, road, waterway and railway trips rose to 56.99 million on the day.

US Crude Inventories Expected Decrease

A recent poll indicates that U.S. crude oil inventories are expected to decrease for the third consecutive week. This could provide some support to the market. However, the final figures will be released by the American Petroleum Institute (API) and the Energy Information Administration (EIA), with their reports due to be released on Tuesday and Wednesday, respectively.

US Interest Rate Hike Worries Oil Traders

The US Federal Reserve is expected to raise interest rates by 25 basis points, which could harm the oil market by reducing economic growth and, as a result, reducing energy demand. Additionally, banking concerns are adding stress to the oil market, with the seizure of First Republic Bank marking the third major US institution to fail in two months. JPMorgan has acquired most of First Republic Bank’s assets as part of the deal.

Technical Analysis

From a technical standpoint, WTI Oil is currently trading below its daily pivot at $78.02, just slightly above the nearest support (S1) at $72.57. The daily pivot is new resistance. Buyers would have to overcome the pivot in order to reestablish upside momentum. Otherwise, our assumption is that they are looking to buy value at $72.57 rather than strength.

Given the bearish pall over the market at this time, the safe play appears to be the value play. Conversely, chasing momentum is the more risky play.

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