Oil Price Fundamental Daily Forecast – Downside Risks Increasing Ahead of EIA Inventories Report

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are lower Wednesday after erasing earlier gains. Prices moved higher shortly after the opening in reaction to private industry data, released late Tuesday that pointed to firm U.S. fuel demand.

The early attempt to claw back some of Tuesday’s more than 5% loss was also reversed by worries ahead of today’s U.S. government inventories report, slower factor output in China, central bank rate hikes and the possibility of more supply from a nuclear deal with Iran.

At 10:11 GMT, October WTI crude oil futures are trading $88.83, down $2.81 or -3.07% and December Brent crude oil is at $95.52, down $0.94 or -0.97%. On Tuesday, the United States Oil Fund ETF (USO) settled at $75.48, down $3.21 or -4.08%.

American Petroleum Institute Weekly Inventories Report

The American Petroleum Institute (API) reported a slight build in crude oil inventories of 593,000 barrels for the week-ending August 26. Analysts were expecting a draw of 633,000 barrels.

The build comes as the Department of Energy released a massive 8.1 million barrels from the Strategic Petroleum Reserves in the week-ending August 26, leaving the SPR with just 450 million barrels.

The API also reported a draw in gasoline inventories this week of 3.414 million barrels for the week-ending August 26, compared to the previous week’s 268,000-barrel build.

Distillate stocks saw a draw of 1.726 million barrels for the week, compared to last week’s 1.051-million barrel increase.

Initially, crude oil traders read the report as friendly since it indicated increased demand for gasoline, but the buying was strong enough to offset the slew of negative events that followed.

Demand Woes Weigh after China’s Factory Activity Extends Declines

Crude oil futures turned south earlier today after the release of a report showing China’s factory activity extended declines in August as new COVID infections, the worst heatwaves in decades and an embattled property sector weighed on production, suggesting the economy will struggle to sustain momentum.

An economic survey showed the world’s second-largest economy is struggling to emerge from the sluggish growth seen in the June quarter, with risks darkening the outlook as high inflation and the Ukraine war hit demand.

Short-Term Outlook

The short-term outlook is bearish with crude oil expected to face headwinds from more supply if Iran signs the nuclear deal. Although the story isn’t making a lot of headlines, some traders are whispering that a deal is getting close, according to Reuters.

Today’s U.S. Energy Information Administration (EIA) inventories report, due to be released at 14:30 GMT, is expected to show a 400,000 barrel crude oil draw. Even if gasoline stockpiles post a draw, I don’t think it will be a trend changing event.

The treat of a mild recession in the U.S. is also making traders nervous, but the reality that Europe will fall into an even deeper period of slow growth is especially bearish.

It may take a major decision from OPEC+ to trim production at next week’s meeting to put a floor in the market. Otherwise, the risks to the downside will continue to grow.