Crude Oil hovers around four months high as supplies tightened

WTI Oil crossed $83 levels today while MCX touched 6852 levels adding to July gains of more than 15%. The oil supply deficit continues to widen with recent Saudi and Russian supply cuts extending through September, though the OPEC+ meeting offered no surprises. The number of oil rigs, an early indicator of future output continues to decline for the 8th straight week to 525, their lowest since March 2022. In recent days, sea drones hit a Russian oil tanker and naval vessel. While exports are continuing, the attacks highlight the threat to fuel flows on a key route to global markets. Key time spreads bullish backwardation continues to widen, indicating tight supplies in the near term (Current WTI spread -$0.50 from 0 in early July). Money managers posted further increases in bullish bets for most oil products last week. The prospect of tighter supplies is expected to support oil prices at least in Q3 and a slew of investment banks recently upgraded their oil price forecasts for 2023, citing tighter supplies.  

The negative trigger right now is that while recent headline numbers for Chinese crude imports pointed to robust oil demand, much of that supply has been stockpiled rather than turned into gasoline and diesel. The nation’s economic recovery continues to show signs of strain this year through weak indicators across manufacturing and infrastructure sectors, weighing on the outlook for commodities. Meanwhile, if this week’s US CPI numbers come higher as expected, remaining above the Federal Reserve’s target range and potentially attracting more hawkish measures, then that could cap further upward tone in the oil markets.

Focus for this week 

  1.   Tuesday – China July Trade data, EIA Short Term Energy Outlook Report  
  2.   Wednesday- EIA Weekly Inventory, China CPI 
  3.   Thursday- OPEC Monthly Market Report, US CPI & Jobless claims 
  4.   Friday- IEA monthly Oil Market Report, Baker Hughes Rig counts

What Lies Ahead? 

A broader outlook for oil prices remains positive as the extension of output cuts in September will further tighten Q3 supplies and the effect of the same could be seen in this week’s monthly reports of the key agencies wherein downward revision in supplies is likely. But, at the same time, China’s trade data and US CPI data to remain key and most likely may be negative for the oil markets, thus bringing a brief correction in the prices. 

For WTI Crude Oil, $83.53 levels (CMP: 82.50) may continue to act as a strong hurdle, but once breached could pave a fresh rally. Geopolitical concerns, if escalates further disrupting oil supplies, which is not the case right now, then we may see oil prices breaching this hurdle. Otherwise, the correction could be extended to $80.40/79.50 levels also. On MCX, immediate hurdle is around Rs 6,890 per bbl level and breaching this level further upside is possible toward Rs 7,200 level. Immediate support is at Rs 6,640/6520. 

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