Oil Price Fundamental Daily Forecast – Pressured by China Covid Curbs as Traders Await Direction from CPI Data

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging lower on Thursday as traders await U.S. inflation data that may offer clues on the direction of Fed policy.

Specifically, the data may reveal whether the central bank can comfortably slowdown the pace of its rate hikes, or if it will have to continue to raise rates aggressively and for a longer period of time.

Raising rates to slow down the economy is important to crude oil traders because it will lead to lower demand especially if it trigger a recession.

At 07:38 GMT, December WTI crude oil futures are trading $85.26, down $0.57 or -0.66% and January Brent crude oil futures are at $92.23, down $0.42 or -0.45%. On Wednesday, the United States Oil Fund ETF (USO) settled at $71.67, down $2.80 or -3.76%.

Renewed COVID Curbs in China Exerting Pressure

A week ago crude oil prices were moving sharply higher on the back of unverified reports that China was preparing to announce it would begin relaxing its strict COVID restrictions in early 2023. This story was put to bed over the weekend when officials said they would continue to impose tight curbs.

This news may have put in the top this week, but driving the market sharply lower are reports of increasing COVID cases in parts of China, and renewed restrictions to control the spread of the virus.

Reuters is reporting that the manufacturing hub of Guangzhou, a city of 19 million people, on Thursday reported more than 2,000 new cases for Nov 9, the third day above that level, in the city’s worst outbreak so far. Additionally, millions of residents were told to get tested for COVID-19 on Wednesday, and one city district has been locked down, as local cases across China reached their highest since April 30.

US CPI Data Could Set the Tone

Today’s U.S. consumer price index (CPI) data, due to be released at 13:30 GMT, could set a bearish tone in the market if it comes in hotter than expected. Ahead of the report, traders are expecting headline inflation and core inflation to show an annual reading of 7.9% and 6.5%, respectively.

Meeting or coming in below the estimates could help ease some of the pressure on the Fed to raise rates aggressively in December. However, a hot reading could force the Fed to continue to ramp up its rate hikes for perhaps an even longer period of time. This would be bearish for crude oil.

Daily Forecast

Not only are concerns over demand driving prices lower, but a rise in U.S. crude stockpiles is also weighing on prices, but not that much since gasoline and distillate stockpiles declined. Furthermore, the market is still being underpinned by the OPEC+ production cuts and the upcoming European Union embargo of Russian oil.

I don’t think the price action is bearish per se. I do think that speculative bulls are removing the premium they put in the market last week when they were betting on China relaxing its COVID curbs.

Inventories are tight and likely to get tighter over the near-term, but traders have to find value first before they stop selling. The key area to watch for WTI futures is $84.72 to $82.59.