Oil Price Fundamental Daily Forecast – Supported by Easing COVID Restrictions, Capped by OPEC+ Decision

U.S. West Texas Intermediate and international benchmark Brent crude oil futures are edging higher on Monday, but the market is trading inside Friday’s range, suggesting investor indecision and impending volatility.

The market is being supported by reports that more Chinese cities eased COVID-19 curbs over the weekend. However, gains may have been limited by OPEC+’s decision to hold their output targets steady ahead of a European Union ban.

At 05:48 GMT, January WTI crude oil futures are trading $80.57, up $0.59 or +0.74% and February Brent crude oil futures are at $86.15, up $0.58 or +0.68%. On Friday, the United States Oil Fund ETF (GLD) settled at $69.84, down $0.61 or -0.87%.

Helping to add some support is the notion that the implementation of the EU sanctions and price cap on Russian oil will tighten the market. However, there is some debate as to whether this news has already been priced into the market. Additionally, the end of the U.S. Strategic Petroleum Releases (SPR) is also providing support.

Some Chinese Cities Ease COVID-Related Curbs

WTI and Brent crude oil prices are being underpinned early Monday by a report that said more Chinese cities including Urumqi in the far west announced an easing of coronavirus curbs on Sunday as China tries to make its zero-COVID policy more targeted and less-onerous after unprecedented protests against restrictions last weekend.

China is set to further announce a nationwide easing of testing requirements as well as allowing positive cases to close contacts to isolate at home under certain conditions, people familiar with the matter told Reuters last week.

This is potentially good news for crude oil prices because it should drive up Chinese demand for fuel and possibly prevent a global recession. This year’s COVID restrictions have had a devastating effect on China’s economy and well as demand for crude oil.

Demand has dropped so much that it may have been one reason why OPEC+ reduced output in October. Another reason for the move may have been the massive SPR releases from the United States that flooded the markets with supply.

No Surprise, OPEC+ Holds Steady Policy

OPEC+ agreed to stick to its oil output targets at a meeting on Sunday as the oil markets struggle to assess the impact of a slowing Chinese economy on demand and a G7 price cap on Russian oil supply.

OPEC+ angered the United States and other Western nations in October when it agreed to cut output by 2 million barrels per day (bpd) about 2% of world demand, from November until the end of 2023, Reuters said.

Short-Term Outlook

The good news for crude oil bulls is coming out of China. The potential for increased demand is there, but the country needs to do more to curb restrictions before it will show up in the economic data. Some analysts suggest some curbs will last until March. So demand may bottom, but we may not see a significant increase for six months.

The decision not to cut production by OPEC+ was no surprise. The group is probably waiting to see the impact of the Russian ban before they make a decision to cut or not cut at its Feb 1 meeting. There is still a lot of confusion as to how it is going to work and if it is going to work.  If prices drop too far, OPEC+ will be there to prop them up.

On Friday, G7 nations and Australia agreed on a $60 per barrel price cap on Russian seaborne crude oil. According to Reuters, many analysts and OPEC ministers have said the price cap is confusing and probably inefficient as Moscow has been selling most of its oil to countries like China and India, which have refused to condemn the war in Ukraine.

The European Union will need to replace Russian crude with oil from the Middle East, West Africa and the United States, which should put a floor under oil prices at least in the near term, Wood Mackenzie vice president Ann-Louise Hittle said in a note.

I also think that anytime a move is made to reduce supply, it tends to be supportive.