The US oil benchmark is down nearly 4% so far last week, snapping seven straight weeks of gains. Investors have increased their bullish bets, with net-longs reaching annual highs.
By Jigar Trivedi
WTI crude futures steadied above $80 per barrel on Friday but were still set to finish the week lower, as China’s weakening economy and fears of further US interest rate hikes outweighed signs of tightening global supplies. The US oil benchmark is down nearly 4% so far this week, on track to snap seven straight weeks of gains. Weaker-than-expected economic data and a deepening property sector crisis in China added to concerns about the country’s faltering economy, with a surprise rate cut from the central bank failing to appease the market. Meanwhile, investors remain cautious amid signs of tightness in the market after OPEC+ majors Saudi Arabia and Russia curtailed supply.
In the past couple of months, the concern was displaced by growing unease about global supply as Saudi Arabia implemented and then extended production cuts that have seen its output drop to 9 million bpd. Drawdown in global oil stocks also contributed to that unease, pushing prices higher and keeping them there for seven weeks in a row. Yet the latest economic data from China has prompted a return to fears about oil demand in the world’s largest importer even if oil-related data coming out of China remains quite robust.
Then there was the prospect of more rate hikes in the United States, which has contributed strongly to the return of bearishness on oil markets. More traders are realizing that U.S. soft-landing prospects might not be a good thing for conquering inflation.
The prospect of more rate hikes was coming amid upbeat economic data, including the latest weekly jobless claims count and the latest monthly retail sales data, both of which suggest the U.S. economy is moving in a positive direction. For the Fed, however, this direction is not exactly positive because a tight labor market and higher spending could keep inflation higher for longer, hence the return of more rate hike expectations among traders. Despite all this, supply concerns have not disappeared. Momentum indicators are showing supply tightness. Investors have started increasing their bullish bets, net-long positions are reaching an annual high.
US drilling activity continue to slow
The number of active oil rigs in the US has fallen by a little more than 15% since the start of the year to 525, according to Baker Hughes, which has left oil rigs at their lowest levels since March 2022. This slowdown in drilling activity will unsurprisingly have an impact on the supply outlook, specifically over 2024. US crude oil supply is expected to grow by a little over 200Mbbls/d between July and December this year, whilst in 2024, average annual supply is expected to grow by a little more than 300Mbbls/d year-on-year. While more modest supply growth is expected, the US is still forecast to produce record levels of crude oil this year as well as in 2024.
As for US inventories, commercial inventories continue to trend lower, having fallen by close to 42MMbbls since mid-March to a little under 440MMbbls currently. Stocks are at their lowest levels since early January, and whilst they are above the levels seen at this stage last year, they are trending just below the five-year average. We are likely to see crude inventories continue to trend lower until September, which is when we should start to see refinery run rates fall due to refinery maintenance.
Oil prices still have more upside
While the oil market has seen quite a bit of strength in recent weeks on the back of tightening in the physical market, we believe that there is still room for the market to move higher. The oil market will continue to tighten as we move through the second half of the year with a deficit of 2MMbbls/d.
The market may remain in deficit over 2024. However, this deficit may be heavily skewed towards the second half of 2024. In fact, we see a small surplus in 1Q24, which suggests that prices could pull back early next year, before moving higher once again. While we still expect Brent to average US$90/bbl over 2024, we have revised the profile.
The assumption behind our 2024 forecasts is that OPEC+ sticks to its planned production targets, whilst the 1.66MMbbls/d of additional voluntary cuts from a handful of OPEC+ producers also continue through 2024.
Outlook
The trend has been positive since the last week of June so we may see technical corrections in the next week in the Brent oil. The near term support is seen near $80/bbl and in WTI oil support lies around $75/bbl. MCX Crude oil September may slip towards Rs 6,450/bbl however, the undertone is bullish hence the market may experience support of bulls from around the support point.
(Jigar Trivedi, Senior Research Analyst – Currencies & Commodities, Reliance Securities Limited. Views expressed are the author’s own. Please consult your financial advisor before investing.)
Source:financialexpress.com