What’s happening in the Crude oil markets?

Product Updates
  • WTI Oil prices retreated from a multi-month high of $84.89 (MCX- Rs 7,028 per bbl) touched in mid-August and slipped toward the $79 per bbl level as demand woes re-emerged from China’s faltering growth and US rate hike fears persisted. 
  • Prices declined further last week to test a month’s low of  $77.59 level (MCX- Rs 6425) on signs of improvement in supplies, particularly from the US. US crude oil production surprisingly rose to 12.8 mbpd during the week ended August 18 against 12.7 and 12.6 mbpd produced during the preceding weeks. Output hovered near the 12-12.2 mbpd range since the start of the year but is now nearing pre-covid highs of 13.1 mbpd. 
  • Signs of a softening in US relations with sanctioned oil producers Iran and Venezuela undercut expectations of tightening global supplies. Talks between the US and Venezuela to temporarily ease restrictions could see a revival in shipments to the US.
  • Nonetheless, global inventories are hovering near a 6-year low for the season and slumped further in July-August with Saudi and Russia supply cuts.  
  • Furthermore, threats to supplies emerging from a Hurricane disruption or geopolitical tensions cannot be ignored. Tropical Storm Franklin has strengthened into a Category 1 hurricane in the Atlantic — becoming the first major for this season. While Hurricane Franklin is not expected to hit the U.S. mainland, big swells are expected to impact the Eastern Seaboard. 

Events-Lined up this week 

Key releases in the week ahead include US GDP, payrolls, JOLTS, personal income and spending, and the Fed’s preferred inflation metric — the core PCE deflator. Also in focus will be the Euro CPI and China’s PMIs. These events, along with the weekly API data due Tuesday followed by EIA inventories the following day may throw more light on the US demand supply numbers.

What Lies Ahead?

Although supply tightness in the oil markets would ease to some extent with US production rising and Iran pumping more oil, we don’t see any significant fall in the prices considering Saudi’s defensive stance.  

  • Saudi might consider extending output cuts of 1 mbpd further in October providing floor to the prices that are struggling to sustain above the $80 level amid prevailing macro headwinds and China’s faltering growth.   
  • The peak hurricane season, and potential supply disruptions, if any, may also provide a temporary boost to the prices. Key oil indicators i.e. the WTI and the Brent front month spread remain in bullish backwardation indicating tight near-term supplies.  
  • For the week, volatility is here to stay in oil prices ahead of key events lined up. However, basis fundamentals, we see a limited downside in the WTI oil and a trading range between $78-$84 levels (CMP: 80 per bbl) for WTI oil this week. MCX Crude oil (CMP: 6,611) is likely to trade in the range of Rs 6450-6,950 per bbl level.