Oil Price Fundamental Daily Forecast – Pressured by Recession Fears, Underpinned by Tight Supply

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Thursday, pressured by a stronger U.S. Dollar and worries that further aggressive interest rate hikes by the Federal Reserve would cast the economy into recession, leading to lower demand. However, so far today, losses are being limited by concerns over tight supply.

At 11:00 GMT, December WTI crude oil futures are trading $88.60, down $1.41 or -1.57% and January Brent crude oil is at $94.86, down $1.30 or -1.35%. On Wednesday, the United States Oil Fund ETF (USO) settled at $74.05, up $0.93 or +1.27%.

Today’s price action represents a flip from Wednesday’s higher close. Yesterday, the Fed boosted interest rates 75 basis points and Chairman Jerome Powell dampened hopes of smaller rate hikes in December when he said it was premature to think about pausing rate increases. However, that potentially bearish news was flattened by another drop in U.S. crude oil inventories.

Fed Signals Higher Peak in Rates

On Wednesday, the U.S. Federal Reserve surprised traders by indicating interest rates would continue higher until inflation reaches their mandated 2% level. This not only dampened expectations of a slowdown in rate increases starting in December but it also fanned the fears of recession by obscuring the global economic outlook.

Higher rates strengthen the U.S. Dollar and a stronger greenback tends to weigh on foreign demand for dollar-denominated crude oil.

Bullish Factors Outweigh Recession Fears

Although rising interest rates and a stronger dollar could put pressure on crude oil prices, so far they are only capping gains. This is because a few factors are helping to underpin prices. They include tight supply concerns due to OPEC+ output cuts that kicked in on Nov 1 and the European Union’s embargo on Russian oil that begins on Dec 5.

Furthermore, comments from earlier in the week also suggest that China may be willing to ease its COVID-19 restrictions. Additionally, Chinese policymakers pledged on Wednesday that growth was still a priority and they would press on with reforms.

Short-Term Outlook

The hawkish Fed decisions appear to have stopped the crude oil rally in its tracks. However, supply concerns seem to be enough to provide a floor for prices. This suggests we could be headed into a rangebound trade until there is more evidence of a global economic slowdown or tightening supply lifts prices higher.