Oil Price Fundamental Daily Forecast – China Demand Recovery Supportive, but Dollar Needs to Weaken

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are slightly lower on Friday, but still in a position to post nearly a 2% gain for the week.

The market is being primarily supported this week by a shockingly strong rebound in China’s factory activity. However, gains are likely being limited by growing concerns about rising U.S. crude stocks and potential rate hikes in Europe.

At 06:30 GMT, April WTI crude oil is trading $77.91, down $0.25 or -0.32% and May Brent crude oil is at $84.47, down $0.28 or -0.33%. On Thursday, the United States Oil Fund ETF (USO) settled at $68.28, up $0.21 or +0.31%.

China Factory Activity This Week’s Bullish Catalyst

Crude oil prices soared earlier in the week after an official report showed China’s manufacturing activity expanded at the fastest pace in more than a decade in February. The results of the report smashed expectations as production zoomed after the lifting of COVID-19 restrictions in late December.

The manufacturing purchasing managers’ index (PMI) shot up to 52.6 from 50.1 in January, according to China’s National Bureau of Statistics, above the 50-point mark that separates expansion and contraction in activity. The PMI far exceeded an analyst forecast of 50.5 and was the highest reading since April 2012.

Crude oil prices rose as investors took a more optimistic view on China’s economic prospects.

Signs of Ample Supply

While optimism over China’s demand recovery helped drive prices higher, worries about an oversupplied market may have helped put a lid on the rally.

In the U.S., crude inventories rose by 1.2 million barrels last week to 480.2 million barrels last week to the highest since May 2021, government data showed, beating analyst expectations of a 457,000-barrel rise. It was the 10^th straight weekly increase.

In other signs of ample supply, Russia’s oil production reached the pre-sanctions level for the first time in February, the Kommersant business daily reported. The Organization of the Petroleum Exporting Countries’ production also rose in February, a Reuters survey showed.

Short-Term Outlook

The short-term trend is likely to be biased to the upside as long as China’s demand continues to recover from COVID-related restrictions. Russian production cuts are also likely to provide support.

Bullish traders would really like to see the U.S. supply overhang to narrow or just go away, but that could take time especially since the Fed is trying to weaken the economy with aggressive interest rate hikes.

The Fed rate hike expectations have also been driving the U.S. Dollar higher, which tends to weigh on foreign demand for U.S. crude oil. Fortunately, a widening discount of WTI to Brent contributed to a jump in U.S. crude exports last week to a record high of 5.6 million barrels per day. Otherwise, the EIA would have reported an even larger inventory build.

If the financial markets continue to build a case for a 50-basis point rate hike in March then gains are likely to be limited since the dollar would likely strengthen.

If traders drop the case for a 50-basis point rate hike at its next meeting then the dollar could weaken, and crude could be underpinned.

We think the U.S. Dollar is the wildcard. Its gains could be limited because the Fed is expected to stop raising rates before the European Central Bank (ECB).