Oil Price Fundamental Daily Forecast – Capped by Bearish API Data Ahead of Government Inventories Report

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading nearly flat on Wednesday after posting a steep sell-off the previous session. Helping to cap gains is a larger than expected rise in U.S. crude inventories and global recession worries. However, losses are being limited by optimism over a potential demand recovery in China due to the lifting of COVID restrictions.

At 10:05 GMT, March WTI crude oil is trading $80.11, down $0.02 or -0.02% and March Brent crude oil is at $86.12, down $0.01 or -0.01%. On Tuesday, the United States Oil Fund ETF (USO) settled at $70.23, down $1.27 or -1.78%.

Factors Driving the Price Action

Despite the apparent stall in the rally and this week’s weakness, WTI and Brent crude oil are up this year in response to the ending of China’s COVID controls and the hopes the Federal Reserve will begin reducing the size of its interest rate hikes.

Additionally, hedge funds have returned with a vengeance, purchasing huge crude oil futures and option positions. The aggressive buying has been driven by a combination of low initial positioning and a sudden increase in confidence about the outlook for the global economy and oil consumption.

Furthermore, recent inflation data have shown the rate of price increases is moderating, which is raising hopes for an early peak in the interest rate cycle. The news has put pressure on the U.S. Dollar, making dollar-denominated crude oil cheaper for foreign buyers.

The news is skewed to the bullish side, nonetheless, the market is facing some headwinds. First, there are concerns over rising U.S. inventories. Secondly, the speed of China’s actual demand recovery remains uncertain.

American Petroleum Institute Weekly Inventories Report

Crude oil inventories rose by 3.378 million barrels, American Petroleum Institute (API) data showed on Tuesday.

Gasoline inventories rose by 620,000 barrels after last week’s API data showed fuel inventories rising by 2.8 million barrels. Distillates fell 1.929 million barrels after falling by 1.8 million bpd in the week prior.

Meanwhile, inventories at Cushing, Oklahoma, increased by 3.378 million barrels on top of the 3.7-million barrel hike reported last week.

Short-Term Outlook

Looking ahead to next week’s Federal Reserve monetary policy meeting, traders expect the central bank to raise its benchmark rate by 25-basis points. This would be smaller than the December rate hike of 50-basis points. The move is expected to keep the pressure on the U.S. Dollar, which would underpin crude oil prices.

Gains could be limited because of the uncertainty over China’s demand recovery and the size of U.S. crude oil and gasoline inventories.

Today’s U.S. Energy Information Administration (EIA) weekly inventories report is not expected to offer any clarity either. It is forecast to show a 1.2 million barrel crude oil build. This would be much lower than the previously reported 8.4 million barrel jump, but not enough to encourage a fresh wave of buying.

In order to attract new buyers, today’s EIA report is going to have to show an unexpected drawdown.