Oil Price Fundamental Weekly Forecast – Likely to Be Capped by Lower Demand Fears

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed over 6.0% lower last week.

The main catalysts behind the selling pressure were worries that the gathering of economic storm clouds could be foreshadowing a global recession that could erode fuel demand, fear that roaring inflation will force the Fed to raise interest rates aggressively to slow the economy and thus, drive down demand and concerns over global demand due to another COVID flare-up in China.

Last week, December WTI crude oil futures settled at $84.65, down $6.70 or -7.33% and December Brent crude oil futures finished at $91.63, down $6.29 or -6.42%. Additionally, the United States Oil Fund ETF (USO) closed at $70.17, up $15.81 or +29.08%.

IEA:  OPEC+ Output Cuts Could Tip World into Recession

A decision by the OPEC+ oil producer group the prior week to rein in output has driven up prices and could push the global economy into recession, the International Energy Agency said last week.

“The relentless deterioration of the economy and higher prices sparked by an OPEC+ plan to cut supply are slowing world oil demand,” the Paris-based agency, which includes the United States and other top consumer countries, said.

“With unrelenting inflationary pressures and interest rate hikes taking their toll, higher oil prices may prove the tipping point for a global economy already on the brink of recession,” it added in its monthly oil report.

Fed Rate Hike Concerns Fuel Recession Fears

Crude oil futures fell sharply late last week after a key consumer inflation report came in hotter than expected, signaling that the Federal Reserve will likely continue with aggressive interest rate hikes.

The CPI reading likely cements the chances of another 75-basis-point rate hike by the Fed at its November 1-2 policy meeting. With some investors fearing rates are being hiked too quickly and the central bank is dragging the U.S. economy into a recession, some crude oil experts are already anticipating lower demand for energy products.

China COVID Flare-Up Could Weigh on Demand

Prices were also pressured last week as recession fears and a flare-up in COVID-19 cases in China raised concerns over global demand.

World Bank President David Malpass and International Monetary Fund Managing Director Kristalina Georgieva warned of a growing risk of a global recession and said inflation remained a continuing problem.

Fears of a further hit to demand in China also weighed. Authorities have stepped up coronavirus testing in Shanghai and other large cities as COVID-19 infections rise again.

Weekly Outlook

Demand will remain the biggest concern this week after the financial markets locked up the chances of another 75-basis-point rate hike by the Fed. Traders know the Fed is on a mission to slow down the economy even if it means recession. They know this will be detrimental to demand.

OPEC also sees lower demand coming, which it why, it joined its allies in cutting production two weeks ago.

Last week, OPEC cut its 2022 forecast for growth in world oil demand for a fourth time since April and also trimmed next year’s figure, citing slowing economies, the resurgence of China’s COVID-19 containment measures and high inflation, Reuters reported.

Oil demand will increase by 2.64 million barrels per day (bpd) or 2.7% in 2022, the Organization of the Petroleum Exporting Countries (OPEC) said in a monthly report, down 460,000 bpd from the previous forecast.

Fear of lower demand may not drive prices substantially lower this week, but it will certainly put a lid on any rally. Last week’s price action indicates traders are in “sell the rally” mode so we expect gains to be limited and the bias to remain to the downside.