In the oil markets, what we saw last month was that the macro headwinds widened as the US debt ceiling remained on the tenterhooks for most of May, monetary tightening in the US continued, the largest economy in Europe went into contraction, and above all these, China’s economic recovery post reopening remained patchy. All of these eventually raised concerns over the oil demand downturn, pushing WTI oil once again toward the $67-$68 level by the end of May. Oil markets largely side-lined the upcoming US summer travel demand that otherwise tends to keep crude and product markets positive in the month of May-June.
Both the global benchmarks, WTI and Brent crude oil prices plunged 11% and 8.6% and settled at $68.09 and $72.66 respectively while in India, the MCX Crude oil prices too plunged 9.4% to close the month at Rs 5,690 per bbl.
After a muddy May however, the month of June started with a lot of optimism as the OPEC meeting held on 4th June surprised markets with Saudi Arabia announcing an additional voluntary cut of 1 million b/d for the month of July, on top of an existing voluntary cut of 500,000 b/d, announced in April. The kingdom also said the 1 million b/d cuts could be extended depending on market conditions. OPEC+ has in place cuts of 3.66 million bpd, amounting to 3.6% of global demand, including 2 million bpd agreed last year and voluntary cuts of 1.66 million bpd agreed in April. These output cuts which were valid until the end of 2023 would now extend until the end of 2024.
Saudi’s supply cut decision to provide a floor to the oil prices, but still upside may remain capped on the macro dropback
Oil prices have seen some recovery in June and are hovering near the $72 level. With risk on sentiments returning and the US summer season demand kicking off, oil prices should continue the positive momentum toward $76 and even $80 levels. Saudi’s output cuts for the month of July will tighten supplies next month and in case of any worsening macro drawbacks, these cuts could be extended beyond July also, thus providing floor to the prices. However, the demand picture is not so rosy and this will keep the upside capped.
Half of 2023 oil demand growth will be coming from China this year, but since the nation’s economic recovery has been patchy and uncertainty still surrounds several key sectors of the economy, we don’t see any sustainable up move in oil prices despite supply cuts. The economic slowdown will last into next year, with inflation declining in the US and a recession arriving in Europe. Thus, all in all, we could say that OPEC’s decision might provide a floor to the oil prices but that doesn’t mean a sharp recovery. For a sustainable up-move, there need strong demand signals from China. Technically, oil prices may find immediate support near the $67 level and strong support at $64 while immediate resistance is near $76 and a close above the same will take prices upward toward $79.50/83.50 levels. For MCX Crude oil immediate resistance is at 6250 and above that 6,600 while support is at 5650 initially and strong support at Rs 5,400.