Oil Price Forecast: Pressured by Worries of Surplus Inventories, Recession

Highlights

• WTI oil prices decline due to global economic headwinds.
• Rising inventories, economic concerns outweigh Saudi Arabia’s output cut.
• Limited short-term price increases expected, potential upside during summer driving season.

Overview

WTI oil prices are edging lower on Wednesday as concerns over global economic headwinds deepened, erasing the gains made after Saudi Arabia’s surprise commitment to deepen output cuts.

Initially, the U.S. West Texas Intermediate Crude Oil benchmark had surged by over $1 following Saudi Arabia’s decision to reduce output by 1 million barrels per day (bpd) to 9 million bpd for July. However, these gains were short-lived as worries of a looming recession and somber economic readings kept a lid on oil prices, undermining the efforts of OPEC+ to maintain stability.

Inventory Surge Raises Concerns

Adding to the negative sentiment, reports from the American Petroleum Institute (API) revealed an unexpected buildup in U.S. gasoline inventories, which rose by approximately 2.4 million barrels, while distillates inventories increased by about 4.5 million barrels during the week ended June 2. This raised concerns about fuel consumption, particularly as travel demand grew over the Memorial Day weekend. The accumulation of stockpiles raised doubts about the world’s top oil consumer’s ability to maintain robust consumption.

US Crude Production to Rise, Demand to Cool

In addition, the U.S. Energy Information Administration (EIA) released a statement on Tuesday indicating that U.S. crude oil production would rise faster than previously expected, while demand growth would cool. This outlook further contributed to the cautious sentiment surrounding oil prices, as it implied a potential imbalance between supply and demand.

Global Uncertainties, Inventories Weigh

Global economic uncertainties and increased inventories overshadow Saudi Arabia’s production cut. China’s official data shows a significant contraction in exports and imports, indicating challenges in finding demand abroad and sluggish domestic consumption. These factors have pushed oil prices down.

Saudi Output Cut to Provide Support

Looking ahead, analysts expect Saudi Arabia’s voluntary output cut, although unlikely to result in a sustainable increase to the high $80s-low $90s per barrel range, to provide some support to oil prices. However, with mixed economic forecasts and indicators in the United States and China, investors remain reluctant to take significant positions.

Traders Eyeing Summer Driving Demand

Nonetheless, there is potential for oil prices to test upside movement as the summer driving season approaches in the United States, supported by tighter global supply conditions. Additionally, the U.S. government’s plans to purchase crude oil to refill the Strategic Petroleum Reserve will serve as a limiting factor on the downside, mitigating the risks of a sharp decline in prices.

Short–Term Forecast:  Limited Upside

In summary, the decline in crude oil prices continues amidst concerns over global economic headwinds. Despite the initial boost from Saudi Arabia’s output cut, the fear of a recession and lackluster economic indicators have outweighed the positive sentiment. Rising inventories and a moderated outlook on production and demand have further dampened the market.

Analysts anticipate limited price increases in the short term, but foresee potential upside during the summer driving season and due to tighter global supply. The planned purchase of crude oil for the Strategic Petroleum Reserve by the U.S. government will help minimize downside risks.

Technical Analysis

WTI Oil is trading on the strong side of $69.97 (PIVOT), making this level support. A sustained over this level will indicate the presence of buyers. This week’s price action indicates buyers are defending the area.

If this creates enough upside momentum then look for the move to possibly extend into $76.28 (R1) over the near-term.

A sustained move under $69.97 (PIVOT) will signal the return of sellers. This move could create the momentum needed to challenge $63.82 (S1) over the near-term.

Resistance & Support Levels