Crude Oil Fundamental Forecast: Bullish
- WTI crude prices build on recovery as global growth rate of Covid cases continues to slow
- Traders have ruled out the risks of Evergrande, but the situation still remains fluid
- Oil outlook remains optimistic ahead of OPEC annual report and coalition meeting
WTI crude oil prices rallied sharply last week, brushing aside initial nervousness towards the start of the week. This was when Evergrande’s contagion problems likely scared the markets ahead of the Federal Reserve’s monetary policy announcement. But those fears then eased when the company made an onshore coupon payment and the People’s Bank of China pumped liquidity into the financial system.
Oil traders should keep an eye on ongoing developments from China, which remain fluid. It was reported that offshore bondholders had yet to receive interest payments by the end of the trading week. The main risk here is that an Evergrande default could weaken Chinese economic growth, and therefore global production. China is, after all, the world’s second-largest economy and a heavy consumer of oil.
What probably kept growth-related commodities afloat were the consequences of the FOMC’s rate decision. There, President Jerome Powell hinted at completing the cutbacks by the middle of next year. The central bank is also quite optimistic about the economic outlook, dismissing short-term risks around the Delta Covid-19 variant. In fact, the price of oil has tended to reverse global growth in cases – see the graph below.
With that in mind, as the world continues to move past the current epidemic and vaccination rates rise, WTI may remain on the offensive. On Tuesday, OPEC is saluted to release its annual world oil outlook. Cartel members recently noted that natural gas shortages are forcing energy consumers to seek substitutes, such as oil. Thus, OPEC could stimulate demand expectations.
It could also be accompanied by further increases in production as OPEC strives to gradually reintroduce supply into the market. But, the next coalition meeting is scheduled for October 4.e. Until then, this may leave prices strong. Keep a close eye on the Fed’s comments this week. President Jerome Powell is scheduled to testify before Congress. Later in the week, the central bank’s preferred inflation gauge will cross the cables, potentially impacting political betting.
Crude Oil Bounces Back as Global Growth in Covid Cases Peaks
Crude Oil Sentiment Analysis
According to Sentiment of IG customers (IGCS), about 38% of retail traders are long-term net crude oil. The downside exposure increased by 8.40% and 11.77% respectively. We generally take a contrarian view of crowd sentiment. Since most traders are net short, this suggests that prices may continue to rise. Recent changes in positioning further underscore the bullish bias of contrarian trading.
* IGCS chart used from 24 auguste report
–– Written by Daniel Dubrovsky, Strategist for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter