Oil Price Fundamental Daily Forecast – Weaker as Demand Becomes Major ‘Unknown’

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading negative for the session on Tuesday after giving back earlier gains. The move should come as no surprise after Monday’s steep reversal to the downside. That move turned the bullish news from over the weekend about the extension of the OPEC+ production cuts into a “Buy the Rumor, Sell the Fact Situation”.

At 09:12, July WTI crude oil is trading $37.21, down $0.98 or -2.57% and August Brent crude oil is at $39.96, down $0.84 or -2.06%.

In our opinion, sentiment is likely shifting to the downside because the supply issues have become the “known” and demand problems have become the “unknown”.  By agreeing to extend the production cuts, OPEC+ is demonstrating it has the ability to control supply. However, it has no control over demand especially given the impact of the coronavirus pandemic.

The U.S. and other countries are gradually reopening their economies, but all this means is that demand will likely increase gradually. So while the supply cuts have driven crude oil well above their May lows and into prices not seen since early March, traders are now asking where’s the increased demand that will be necessary to drive prices even higher.

On Monday, in our technical piece on crude oil, we also touched on the premise that too many analysts had turned higher over the weekend after the OPEC+ deal was struck. Our contrarian view appears to be right since the markets are following-through to the downside today following Monday’s potentially bearish closing price reversal top.

To get good at trading crude oil, one has to work with the market every day, not only when there is obvious bullish or bearish news. We’re dealing with speculation here, hence the name “futures”. Traders anticipate the outcomes of events and bet accordingly. In this case, since the first production cuts were working, investors bet on an extension. Once the deal was announced, the early buyers had to find someone to sell to in order to book profits, and those buyers were the ones reacting to the headlines.

Daily Forecast

Yesterday’s technical closing price reversal top and subsequent confirmation of the potentially bearish chart pattern suggests the wheels may have been set in motion for a near-term setback. This short-term pullback comes as no surprise. Traders may be getting tired chasing prices higher and may be now waiting for a pullback into a value area. Furthermore, hedge funds and money managers have to book profits or they’d go out of business.

We’re going to be watching for a near-term correction into a value area, and hopefully, the demand picture will improve enough to bring in the buyers.

In other news, at 20:30 GMT, the American Petroleum institute will release its weekly inventories report. Traders will be focusing on the gasoline and distillate numbers since they best reflect demand.

Early guesses show that traders expect U.S. crude oil and gasoline inventories to have fallen by 1.5 million barrels and about 100,000 barrels respectively in the week to June 5. However, distillate inventories, which include diesel and heating oil, were seen rising by 2.9 million barrels.

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