Oil Price Fundamental Daily Forecast – Bearish as Focus Shifts to CPI Data, Fed Policy, US Recession

U.S. West Texas Intermediate and Brent crude oil futures closed lower on Friday, capping off a week that featured double-digit losses.

The markets rallied early at the start of the week despite the OPEC+ decision to leave production levels unchanged. Prices were also lifted by general uncertainty fueled by the start of the European Union price cap on Russian seaborne crude oil.

However, recession and lower demand fears erased those gains and then some.

On Friday, January WTI crude oil futures settled at $71.02, down $0.44 or -0.62% and February Brent crude oil futures finished at $76.10, down $0.05 or -0.07%. The United States Oil Fund ETF (USO) closed at $62.86, up $0.15 or +0.24%.

Fed Interest Rate Fears Pressure Prices

The selling pressure started on Monday when crude oil prices fell over 3% after U.S. service sector data raised worries that the Federal Reserve could continue its aggressive policy tightening path.

During the session, WTI’s front-month contract began trading lower than prices in half a year, a market structure called contango, which implies oversupply.

U.S. services industry activity unexpectedly picked up in November, with employment rebounding, offering more evidence of underlying momentum in the economy as it braces for an anticipated recession next year. The news caused oil to erase all of its earlier gains and the selling pressure continued throughout the week.

The surprisingly strong non-manufacturing data challenges hopes the Fed might slow the pace and intensity of its rate hikes amid recent signs of ebbing inflation.

Short-Term Outlook

Stripping away all the noise, the threat of higher interest rates for a longer period of time by the Federal Reserve was the major catalyst driving the price action last week. Everything – OPEC+, EIA inventories, EU price caps, relaxed COVID restrictions in China – took a backseat to the Fed.

The selling pressure could carry over into this week on Monday and Tuesday ahead of Wednesday’s Federal Reserve interest rate decision.

On Tuesday, traders will get a chance to react to the latest data on consumer price inflation (CPI). A hot number will be bearish for crude oil because of its likely negative impact on the Fed’s interest rate decision.

The Fed is widely expected to raise its benchmark interest rate by 50 basis points. However, a higher than forecast CPI report will likely mean the Fed will have to raise rates higher. And for a longer period of time. This could push the U.S. economy into recession, which would do serious damage to the crude oil demand outlook.