OPEC cuts supply, price cap on Russian oil

WTI Crude oil futures ended the previous week 0.09% lower and closed at $86.79 per bbl on demand concerns and rising stockpiles. In China, Chengdu extended a lockdown for most of its 21 million residents, highlighting the country’s strict adherence to its zero-Covid strategy that derails economic recovery and clouds the demand outlook.

US crude oil inventories jumped 8.844 million barrels in the week ended 2nd September, the most since April. Also, gasoline stocks went up by 0.333 million barrels, versus forecast for a 1.667 million draw. Meanwhile, crude stocks at Cushing, Oklahoma, decreased by 0.501 million barrels and distillate stockpiles, which include diesel and heating oil, rose by 0.095 million barrels. Crude inventories are rising amid weak demand from refineries, as we move away from the peak summer driving season.

In the September meeting, OPEC+ agreed to shave a modest 100,000 barrels a day off production quotas for October. The decision exactly reverses the September increase that was made in response to entreaties from US President Joe Biden to help bring down oil prices. The first OPEC+ oil supply cut in more than a year shows the group is serious about managing global crude markets and willing to take pre-emptive action, said group leader Saudi Arabia.

WTI oil touched a seven month low of $81.7 per bbl before paring the losses on supply concerns. Price caps on Russian natural gas mulled by EU ministers prompted President Putin to threaten the immediate halt of all energy exports to Europe, including oil and coal. In addition, OPEC+ unexpectedly agreed to cut output by 100,000 barrels a day from October in the September meeting, with Saudi Arabia signaling further action. MCX Crude oil September futures closed at Rs.6,909 per bbl, down by 0.83%.

Outlook for the week : US CPI data in focus

Volatility is expected for the week as market awaits key inflation data from US for more cues on Fed’s rate hike path ahead of the FOMC meeting due next week. Earlier last week, ECB raised the benchmark rates by 75 basis points and indicated a similar move in November meeting. Fed is also expected to go for 75 bps rate hike in September and market worries of a slowdown in demand amid aggressive central bank tightening to curb inflation, which might weigh down on oil prices. Demand from major consumer China remains subdued amid strict zero covid policy and extension of lockdowns.

Recent bounce back in oil prices can be mainly attributed to sharp fall in dollar index and it is not expected to sustain. Demand concerns and rising supplies might weigh down on oil prices going forward. West is actively formulating a price cap mechanism without affecting Russian oil output. We expect MCX Crude oil September futures to trade in the range of Rs.6,500 – 7,250 per bbl, with a downward bias.














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