Oil Price Fundamental Daily Forecast – Worsening US-China Relations Likely Source of Impending Volatility

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging lower on Friday with prices dragged down by weak U.S. fuel demand, fears of a second wave of coronavirus cases in South Korea and a worsening in U.S.-China relations. Nonetheless, the markets remain on track for a hefty monthly gain.

At 11:55 GMT, July WTI crude oil is trading $32.85, down $0.86 or -2.55% and August Brent crude oil is at $35.28, down $0.75 or -2.08%.

Both futures contracts are also in a position to post their first weekly loss after four consecutive weeks of gains that leave them set for the biggest monthly gains in years thanks to production cuts and optimism over Chinese-led demand recovery, analysts said.

WTI is on track for a record monthly gain of 72% in May, with Brent set for a 35% increase that would represent its strongest monthly rise since March 1999, Reuters said.

There are headwinds, however, which is likely the reason behind this week’s abrupt halt of the current rally.

“The global reaction to China’s move to propose new security laws for Hong Kong continues to increase, while there’s a score of new COVID-19 cases in South Korea,” said Rystad Energy’s head of oil markets, Bjornar Tonhaugend.

U.S. President Donald Trump is due to announce his response to the situation in Hong Kong later on Friday. His announcement is likely to be the source of volatility later in the session.

Despite US-China Issues, There are Positives

Thursday’s data from the Energy Information Administration (EIA) showed that U.S. crude oil and distillate inventories rose sharply last week. Fuel demand remained slack even as various states lifted travel restrictions they had imposed to curb the coronavirus pandemic, analysts said.

However, storage in Cushing, Oklahoma, the main delivery point in WTI, decreased by 3.4 million barrels, and refinery utilization also rose to 71% from 69%.

Additionally, producers have scaled back output at a record pace as plunging prices made operation uneconomical. OPEC and its oil-producing allies agreed to the steepest production cut in history during an extraordinary, multi-day meeting in April. Then, earlier in May, Saudi Arabia said that, beginning June 1, it would voluntarily cut an additional 1 million bpd, on top of its portion of the cuts agreed to by OPEC+. Kuwait and UAE were among the other cartel members that followed suit and said they would also exercise additional cuts.

Daily Forecast

The wild price swings seem to be behind us, but the market is still vulnerable to a steep retracement of the recent rally. Traders are now waiting for the next OPEC+ meeting to set the longer-term tone. However, over the short-run Trump’s announcement regarding China’s influence in Hong Kong is likely to set the tone. We’re looking for a near-term correction of the recent rally.

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