CRUDE OIL FORECAST: BEARISH

Crude oil prices hit 7-month low amid US-China trade war escalation

Deeper losses seen ahead if US CPI print cools Fed rate cut prospects

Lasting lifeline unlikely from upbeat Chinese data, OPEC+ jawboning

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Last week, crude oil prices succumbed amid US-China trade war escalation. The WTI benchmark touched the lowest level in seven months after Beijing retaliated with currency depreciation and a ban on US agricultural imports to a threat from Donald Trump. The US President moved to expand tariffs to an additional $300 billion in Chinese imports – covering nearly all bilateral trade – starting September 1.

Although détente would benefit both parties, a swift resolution now seems decidedly unlikely. This means that traders must now contend with the ever-present risk that some provocative soundbite from either Washington or Beijing might spook the markets at a moment’s notice. That ought to undermine risk appetite, capping scope for gains in cycle-sensitive assets including crude.

US CPI DATA MAY COOL FED RATE CUT BETS, HURT OIL IN RISK-OFF TRADE

The economic data docket seems unlikely to be helpful either. July’s US CPI report is expected to put core inflation at a healthy 2.1 percent on-year, suggesting the Federal Reserve may not be nearly as ready for another rate cut in September as the markets now presume. The priced-in outlook implies certainty in another 25bps reduction and a formidable 33 percent chance of a 50bps one.

Such exuberance is pointedly absent from recent comments by even very dovish FOMC committeemembers, like St Louis Fed President James Bullard. Inflation figures that endorse a more circumspect approach and force investors to trim stimulus bets would be unwelcome amid growing global slowdown fears, especially if they are endorsed by soft results on bellwether GDP readings from Germany and Singapore.

CHINESE DATA, OPEC+ JAWBONING UNLIKELY TO OFFER OIL A LASTING LIFELINE

The week is not entirely without potential bright spots. Recent improvement in Chinese economic data outcomes relative to baseline forecasts opens the door for upside surprises on incoming industrial production and retail sales statistics. That might lift investors’ spirits somewhat, but a single month’s results probably won’t offset macro headwinds gathering steam since early 2018 in a lasting way.

On balance, this seems to point toward deeper losses as the path of least resistance for crude oil. Corrective forays to the upside are to be expected, particularly if Saudi officials continue to jawbone prices upward. However, it seems unlikely that Riyadh and its OPEC+ allies can convince the markets that they are able to provide sustainable support even as demand prospects wither.

--- Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivakon Twitter

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