Oil tumbled on recession-driven demand concerns

WTI Crude oil futures declined during all the trading days in the previous week and closed down more than 11% wow, below $72 per bbl. Optimistic reports from China were mired by deteriorating global growth, disappointing inventory data from the US, and a demand downgrade by EIA in the monthly outlook. Advanced economies, especially the US and Europe, are witnessing a drop in manufacturing activity due to tightening financial conditions.

On the supply front, OPEC+ decided to stick to their existing policy of reducing oil output by 2 million barrels a day from November through 2023. At the same time, an uptick in US crude oil output also hurt the sentiments as weekly production rose to 12.2 mbpd from 12.1 mbpd previously reported. Weekly inventory data released by EIA showed that Crude stocks edged lower amid higher refinery utilization, however, gasoline and distillate inventories rose sharply, pointing to weak demand. EU ban on Russian oil also failed to enthuse bulls. The continent-wide ban on Russian seaborne exports was effective from 5th December, but there were hardly any supply disruptions, as markets were widely expecting. G7 nations implemented a price cap at $60 per bbl for Russian oil exports, however, Russian oil was trading well below those levels, to cause any disruption or a strong retaliation from Russia.

Easing restrictions in China has been a soothing factor, with Beijing dialing back some of the virus curbs, following widespread protests, with several cities scrapping testing requirements that have hindered movement in the world’s top crude importer. Meanwhile, data released earlier last week, showed that China imported 46.74 million metric tons of crude last month, or about 11.42 mbpd, the highest in ten months. However, this was overshadowed by a sharp fall in both exports and imports, citing a slowdown in the world’s second-largest economy.

In the short-term energy outlook, EIA raised its forecast for 2023 oil production, reversing course after five straight months of cuts that stoked concern about a slowdown in output from shale fields. The agency also slashed the global oil demand growth for 2023 by 160,000 barrels to 1 mbpd. Amid a lack of supply disruptions and a weak demand outlook, speculative long positions have seen a good amount of liquidation. Money managers have decreased their bullish Brent and WTI oil bets by 7,232 combined net-long positions to 267,749, the least bullish in almost three years, CFTC data showed.

Outlook for the week

Oil has weakened sharply this month, erasing all of the war premium and one year’s gains, as central banks tighten monetary policy and the macroeconomic outlook sours. Growing concerns about a recession-driven demand downturn, particularly among advanced economies continue to put downward pressure on oil prices.

Last week, TC Energy Corp. declared a force majeure on its Keystone oil pipeline system, which can carry more than 600,000 barrels a day from Canada to refiners in the US Gulf Coast. The crucial North American pipeline remains shuts and is providing some interim support to prices or at least limiting the downside. Meanwhile, Russian President Vladimir Putin said that Russia may cut its oil production in response to the G-7 price cap and a decision on Moscow’s response will be announced in a presidential decree within the next few days. As of now, investors are shrugging off prospects of any potential supply cut.

Recessionary concerns are going to take center stage for the week, with FOMC, ECB, and BOE meetings in focus. Broad risk-off sentiments prevail in the market amid a slew of central bank meetings. Any consensus for a recession or extreme hawkishness from CBs might prompt further sell-off. OPEC and IEA’s monthly outlooks will also be released this week and they are expected to slash demand growth amid slowing global economic activity. We expect MCX Crude oil December futures to trade in the range of Rs.5,500 – 6,700 per bbl for the week, with a downside bias.




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