Oil Price Fundamental Daily Forecast – Hotter-Than-Expected Inflation Fuels Demand Fears

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading mixed after reversing earlier weakness as traders await the release of the weekly U.S. government inventories report.

Despite a tight physical market, crude oil futures have been under pressure this week amid worries that aggressive rate hikes to stem inflation will slow economic growth and hit oil demand.

This theory is likely to be tested over the next several months because today blockbuster U.S. consumer inflation report solidifies the widely expected 75-basis point rate hike by the Fed on July 27 and likely means policymakers will raise rates by the same amount at its September meeting.

At 14:56 GMT, September WTI crude oil is trading $93.65, up $0.34 or +0.36% and September Brent crude oil is at $99.41, down $0.08 or -0.08%. The United States Oil Fund ETF (USO) is trading $73.30, up $0.49 or +0.67%.

Consumer Inflation Data Signals More Aggressive Fed Rate Hikes, Lower Demand

The consumer price index rose 9.1% in June on a year-over-year basis. That’s well above a Dow Jones estimate of 8.8% and marked the fastest pace for inflation since December 1981.

Core CPI, which strips out volatile food and energy prices, popped 5.9%, compared with a 5.7% estimate.

With both headline and Core CPI rising, the Fed is going to have to remain aggressive. This could put further pressure on an already slowing economy, which would lead to lower demand for crude oil.

US Energy Information Administration Weekly Inventories Report

Today’s EIA report could set the tone into the close on Wednesday. According to early estimates, traders are pricing in a 1.5 million barrel crude oil drawdown. This would come as a major surprise because late Tuesday, the American Petroleum Institute (API) reported a large build versus estimates calling for a draw.

The API reported a large build this week for crude oil of 4.762 million barrels, while analysts predicted a draw of 1.933 million barrels. The API also reported a build in gasoline inventories this week of 2.927 million barrels for the week-ending July 8, compared to the previous week’s 1.814-million-barrel draw.

Short-Term Outlook

Today’s price action suggests traders should expect heightened volatility over the near-term. It also indicates that traders are still looking for value.

The key value area for September WTI crude oil is $89.54 to $82.80 and for September Brent crude oil, the key area is $93.16 to $86.42.

These two areas are controlling the longer-term direction of crude oil and are very important to the structure of the current bull market.