Oil Price Fundamental Daily Forecast – Renewed Demand Destruction Plus Higher US Production Could Derail Rally

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures settled lower on Friday in a lackluster trade. Despite Thursday’s technical closing price reversal bottom, there was no follow-through to the upside, which suggests the previous day’s move was likely fueled by position-squaring rather than new buying.

On Friday, August WTI crude oil settled at $38.49, down $0.23 or -0.59% and September Brent crude oil finished at $40.93, down $0.19 or -0.46%.

After surging to their highest levels since March 6 earlier in the week, both WTI and Brent crude oil succumbed to pressure from renewed COVID-19 concerns and the possibility of another round of demand destruction, growing U.S. stockpiles and the possibility of increased production, and simmering U.S.-China relations that could derail the Phase One trade deal.

COVID-19 Worries and Fear of a Second Wave of Demand Destruction

The rapid rise of coronavirus cases in the U.S., South America and South Asia weighed on prices throughout the week as it brought back memories of the demand destruction that drove nearby futures prices below zero in May. The fear is that even if lockdowns are eased, people will stay home because of the perceived health risks, putting pressure on demand for gasoline and distillates.

US Inventories are at Record Highs and Could Move Even Higher

The U.S. Energy Information Administration (EIA) reported on Wednesday a 1.4-million-barrel increase in crude oil inventories for the week to June 19, with fuel inventories booking mixed results. Traders were looking for a build of 1.2-million-barrels.

The EIA also reported a draw of 1.7 million barrels of gasoline for the week-ended June 19, compared with a decline of the same size for the previous week. In distillate fuels, where demand has been slower to recover than in gasoline, the EIA reported an inventory rise of 249,000 barrels for the week to June 19, up from a 1.4-million-barrel draw reported for the previous week.

Refinery runs averaged 13.8 million bpd, up from 13.6 million bpd a week earlier. Gasoline production last week averaged 8.8 million barrels daily, up from 8.4 million barrels daily a week earlier. Production of distillates averaged 4.6 million bpd last week, compared with 4.5 million bpd a week earlier.

Additionally, a Dallas Federal Reserve Bank survey of executives in the top U.S. oil and gas producing region found more than half of executives who cut production expect to resume some output by the end of July.

China Warns US ‘Meddling’ in Hong Kong Could Derail Phase One Trade Deal

Chinese official recently expressed “strong dissatisfaction” with U.S. sanctions that came in response to a new national security bill on Hong Kong, warning that crossing “red lines” and meddling in what China considers its own internal affairs could put the trade deal at risk, The Wall Street Journal first reported on Friday.

China’s comments were in response to a move by U.S. legislators the day before. On Thursday, in response to China’s sweeping national security bill for Hong Kong, the U.S. Senate unanimously passed a new bill that places sanctions on Chinese officials and businesses who undermine Hong Kong’s autonomy from Beijing.

For a look at all of today’s economic events, check out our economic calendar.