Oil Price Fundamental Weekly Forecast – Bulls Betting Lower CPI Weakens Dollar, Extends Current Rally

Last week saw the U.S. Dollar re-emerge as one of the biggest influences on crude oil prices after the greenback fell sharply in reaction to speculation the Federal Reserve could slow down the pace of future interest rate hikes.

The price action strongly suggests the U.S. currency has been putting a cap on oil prices since possibly March. It also indicates that if the Fed does decide to slow its rate hikes, the dollar could extend its losses and oil prices could soar to perhaps the psychological $100 price level.

Last week, December WTI crude oil prices settled at $92.61, up $4.71 or +5.36% and January Brent crude oil finished at $98.57, up $4.80 or +5.12%.

The markets were also supported last week by speculation about a possible end to COVID-19 lockdowns despite the lack of any announced changes.

Support was also coming from the supply side where traders are expecting to see tighter conditions due to the ongoing OPEC+ production cuts and the upcoming European Union’s embargo on Russia’s seaborne crude exports, which is expected to begin on December 5.

Greenback Retreats Increasing Demand for Dollar Denominated Crude Oil

WTI and Brent crude oil received a boost on Friday after the U.S. government reported a greater-than-expected rise in the unemployment rate in October. This suggests that the Fed’s interest rate hikes may be having an effect on the labor market, which policymakers believe will eventually push down inflation.

However, there are some who believe the Fed may want to see a trend develop before ordering the slowdown in rate hikes. However, this Thursday’s U.S. consumer inflation (CPI) report could go a long-way in determining whether the Fed pulls back or maintains its super-sized rate hikes in December.

Weekly Outlook

The market is expected to open the week underpinned by the OPEC+ supply cuts and the planned EU embargo on Russian oil. However, it’s going to need a catalyst to extend the rally. One catalyst could be increased demand from refiners. Another could be a weaker U.S. Dollar.

According to reports, U.S. refiners are expected to substantially increase its refining activity, while China’s largest private refiner Zhejiang Petroleum and Chemical Co (ZPC) is reportedly raising diesel output.

Another potentially bullish catalyst will be a weaker U.S. Dollar, but this will depend on the outcome of the CPI report. Traders are expecting the report to show U.S. inflation in October rose annually by 7.9%.

If the CPI data comes in higher than expected then look for the dollar to strengthen, capping the rally in crude oil.

If the CPI data comes in lower than estimated then look for the greenback to weaken, driving up demand for dollar-denominated crude oil.

The wildcard this week could be China’s COVID restrictions. Gains could be limited if China decides to continue with its austere limitations. However, prices could rise sharply if China even hints at reducing its COVID curbs.