Oil Price Fundamental Daily Forecast – Global Contraction Fears, Demand Destruction Worries Weighing on Crude

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are under pressure for a second session on Tuesday on fears a global recession will lead to demand destruction. Meanwhile, although the chances of a big increase in production by OPEC and its allies is remote, traders are taking no chances and moving to the sidelines ahead of Wednesday’s meeting.

At 05:00 GMT, September WTI crude oil futures are trading $93.09, down $0.80 or -0.85% and December Brent crude oil is at $95.80, down $0.67 or -0.69%. On Monday, the United States Oil Fund ETF (USO) settled at $75.12, down $2.93 or -3.75%.

Weak Factory Data Driving Global Economic Contraction Fears

Fears of a massive global contraction were raised on Monday when manufacturing surveys from the United States, Europe and Asia showed that factories struggled to find their footing in July after promising results the previous month.

The struggle for momentum suggests the world may be sliding into recession after a series of purchasing managers’ indexes (PMIs) for July showed new orders falling in the manufacturing powerhouses although they did not show price pressures may be waning.

The data suggests that while the series of rate hikes around the world may be knocking down prices, they are also destroying global economic growth in the process.

First Domino to Fall:  Asia

South Korea’s factory activity fell for the first time in almost two years while Japan saw its slowest growth in activity in 10 months. Activity growth in China also slowed despite the easing of COVID-19 restrictions.

More Weakness in Europe

In the Euro Zone, S&P Global’s Final Manufacturing Purchasing Manager’s Index (PMI) fell to 49.8 in July from June’s 52.1, its first contraction since June 2020.

Worsening Outlook for US Demand

The Institute for Supply Management (ISM) said on Monday that its index of U.S. factory activity dipped to 52.8 last month, the lowest reading since June 2020, when the sector was pulling out of a COVID-19 induced slump.

Short-Term Outlook

Well, what did you expect when the central bank’s started to raise interest rates? None of this is a surprise since rate hikes cool off economies. We expect the central banks to continue to lift rates because their missions are to drive down inflation. The global economy can’t handle runaway inflation, but it can eventually adjust to a slower economy. The game is to keep pushing down inflation while limiting the risk of a long-term recession. That’s the challenge.

With demand falling and expected to decline further, perhaps OPEC and its allies, may even consider reducing production to protect prices against a steep plunge. It will be interesting to see if they even talk about reducing prices to offset a sizeable drop in demand. But that may not be the best thing to do if the global economy is in recession.

That being said, warnings about lower demand are going to make it hard for OPEC policymakers to agree to an impressive production hike on Wednesday.