Oil Price Fundamental Daily Forecast – Pressured by China COVID Concerns, Weak Factory Activity Data

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are moving lower on Monday following the release of weaker-than-expected factory activity data out of China and on concerns over expanded COVID1-9 restrictions and their impact on demand.

At 08:14 GMT, December WTI crude oil is at $86.90, down $1.00 or -1.14% and December Brent Crude oil is at $94.84, down $0.93 or -0.97%. On Friday, the United States Oil Fund ETF (USO) settled at $72.84, down $0.78 or -1.06%.

China’s Factory Activity Unexpectedly Fell; Official Services PMI Contracts in October

China’s factory activity unexpectedly fell in October, pressured by softening global demand and strict domestic COVID-19 curbs, which hit production, travel and shipping in the world’s second-largest economy, Reuters reported.

While China’s economic growth beat expectations in the third quarter, persistent COVID-19 curbs, a prolonged property slump and global recession risks are clouding a more robust revival in factory and consumer activity, according to Reuters.

The official manufacturing purchasing managers’ index (PMI) fell to 49.2 from 50.1 in September, the National Bureau of Statistics (NBS) said on Monday. The result unexpectedly broke below the 50-point market that separates growth from contraction with economists in a Reuters poll forecasting the PMI to have come in at exactly 50.0.

Separately, the non-manufacturing PMI, which looks at service sector activity, fell to 48.7 from 50.6 in September.

COVID Restrictions Weigh on Demand

As of last week, 31 cities have implemented various levels of lockdowns or some kind of district-based control measures, affecting around 232 million people, Nomura said in a research note.

Economists see China’s current zero-COVID policy as a major economic constraint and expect restrictions to stay in place for some time after this month’s Communist Party Congress.

Another reason why there could be lower demand from China, economists expect China will miss its annual growth target of around 5.5%, with the latest Reuters poll forecasting 2022 growth at 3.2%. The poll showed China’s growth could pick up to 5.0% in 2023.

Daily Forecast

Crude oil could be under pressure throughout the session, but support could be on the horizon. Prices could be underpinned by optimism over record U.S. crude exports as well as speculation that central banks could be nearing the end of rate-hiking cycles.

The best support could be provided by the OPEC+ output cuts that are expected to kick in on November 1. This could lead to a loss of production of 1 to 2 million barrels per day. Furthermore, the European Union is preparing to implement an embargo on Russian oil. This could further tighten supply.