Oil Price Fundamental Daily Forecast – China’s Cloudy Demand Outlook Limiting Advances

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are inching higher on Tuesday, helped by a weaker U.S. Dollar. Despite the early strength, the markets appear to be consolidating inside a $3.00 range likely due to below average holiday volume.

While the weaker greenback may be driving up foreign demand for the dollar-denominated asset, gains are being limited by concerns over rising interest rates and a possible recession that could curtail demand. Worries over China demand are also capping gains.

At 14:22 GMT, March WTI crude oil futures are trading $76.02, up $0.58 or +0.77% and March Brent crude oil is at $80.75, up $0.61 or +0.76%. On Monday, the United States Oil Fund ETF (USO) settled at $66.03, up $1.13 or +1.74%.

The U.S. plan to replenish petroleum reserves is also providing support, but gains are being capped by uncertainty over the impact of rising COVID-19 cases in top oil importer China.

Weaker US Dollar Underpins Prices

The U.S. Dollar is under pressure on Tuesday despite a rise in U.S. Treasury yields. The greenback lost ground after the Bank of Japan unexpectedly raised its cap on 10-year Japanese government bond yields.

The BOJ caught markets off guard by tweaking its yield controls to allow the yield on its 10-year JGB to move 0.5% either side of its 0% target, up from 0.25% previously, in a move aimed at cushioning the effects of protracted monetary stimulus measures.

The move prompted the Japanese Yen to rise suddenly, driving the dollar lower, and fueling an uptick in crude oil prices.

US Buyback Providing Support

Oil prices are being supported this week by the U.S. plan to buy up to 3 million barrels of oil for the Strategic Petroleum Reserve after this year’s record release of 180 million barrels.

API and EIA Inventories Reports on Tap

U.S. crude oil stocks are expected to have fallen last week by about 200,000 barrels while gasoline and distillates inventories were expected to be higher, a preliminary Reuters poll showed on Monday.

The poll was conducted ahead of reports from the American Petroleum Institute (API) late Tuesday and the Energy Information Administration (EIA) on Wednesday.

Short-Term Outlook

There appears to be enough bullish news to underpin prices, but clearly the below average holiday volume is having an impact on the price action.

Barclays analysts are predicting a drop in Russian oil output of about 1 million barrels per day by the end of March after full implementation of EU sanctions, but it’s going to take a boost in China demand to drive prices sharply higher.

The oil demand forecast will be the game-changer. Unfortunately for the bulls, China’s demand outlook is unclear at this time.

We’re likely to see choppy, two-sided trading until there is more clarity about the demand picture.