Crude Oil Fundamental Outlook - Bullish
- Crude oil prices may rise on Saudi Arabia output cut, US stimulus
- Rising longer-dated Treasury yields may boost USD, slow oil gains
- WTI event risk: OPEC monthly report, EIA storage, US retail sales
WTI crude oil prices spent most of this past week rallying amid a couple of fundamental developments that may keep energy prices afloat ahead. The first was Saudi Arabia surprising markets after the nation announced that it will cut output by 1 million barrels per day next month and in February, an outcome from the 13th OPEC and non-OPEC Ministerial Meeting.
The oil-producing cartel drastically reduced output last year amid the coronavirus pandemic to help stabilize prices. Since then, OPEC+ has been working on gradually bring back production as demand recovers. As such, Saudi Arabia’s action caught many investors off guard. Further insight into the supply and demand outlook will be known on Thursday when OPEC releases its latest monthly oil outlook report.
The second key development was Senate Democrats winning both runoff elections in Georgia. This cemented a razor-thin majority in the upper chamber. Vice President-elect Kamala Harris will act as the tie-breaking vote in future 50-50 split scenarios. In other words, prospects of larger-than-expected stimulus were bolstered in the near-term, opening the door to greater demand for oil.
On the chart below, implied demand for the commodity in the United States touched its highest since early August, offering a bullish case for oil ahead.
| Change in | Longs | Shorts | OI |
| Daily | -3% | 6% | 2% |
| Weekly | -7% | 2% | -1% |
The direction of the US Dollar can also have key implications for crude oil prices, which are largely priced in the Greenback globally. In fact, on the next chart below, I have highlighted what has been a persistent inverse relationship between the US Dollar and WTI. Here, there is a downward risk brewing for energy prices that may slow down the recent aggressive pace in gains.
US longer-dated Treasury yields soared this past week as the 10-year and 30-year traded around highs from early 2020 following some consolidation. This was likely fueled by fiscal stimulus prospects under a Joe Biden administration, opening the door to a continued economic recovery in the medium term. A rising appeal in US government debt may introduce some breathing space for USD following persistent losses, cooling oil prices.
Weekly US EIA inventories may offer some short-term volatility for energy prices on Wednesday. On Friday, local retail sales are expected to shrink for a third consecutive month in December. University of Michigan Sentiment will also cross the wires. The reading is anticipated to decline from the previous outcome. Another risk for energy prices is stricter lockdowns amid a new more-contagious Covid strain globally.
WTI Crude Oil Daily Chart
--- Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
