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While crude oil has been on a slippery slope, Brent crude slipping below $70bbl on Tuesday was a first since December 2021. Where do you see the prices bottoming out?
Crude oil prices have dropped to levels not seen since December 2021, as demand concerns overshadow supply disruptions and geopolitical tensions. The slowdown in the US and China has been the primary driver behind the decline, with additional pressure from investment banks predicting that prices will remain subdued in the coming quarter. Market sentiment remains cautious, especially as China’s stalled recovery has shaken investor confidence in its economy.Prices are likely to find support around Rs 5,500 on MCX and $65 on NYMEX WTI. However, while potential OPEC+ production cuts and a possible 25 bps rate cut may provide temporary relief, overall market fundamentals suggest continued downward pressure. Ample supply and weak demand growth projections are expected to keep prices low in the near term.What will be its impact on the commodity markets and crude oil contracts in terms of volumes and value?
Crude oil has been range bound for much of the year and have recently witnessed heightened volatility amidst the ongoing sell-off, creating a compelling opportunity for traders. With a fall in prices, the contract value of the commodity has come down by 10% in the last few days, where investors can capitalise on this downturn by strategically positioning themselves to profit from the falling prices.Volatility is a friend of option buyers and such directional plays with intermediate volatile bouts will keep the trading volumes elevated with additional interest from both futures and options traders. This heightened volatility provides a window for short-term trades, allowing for potential gains as the market reacts to weak demand signals and broader economic concerns.While we know that US and China consumptions are triggers, how much could be the scale of the hit?
China’s domestic consumption continues to be a key area of concern, as it is impacted by uncertainties in the housing sector and a slowdown in discretionary spending. While the Chinese government has implemented measures aimed at stimulating domestic demand, the current scale of these efforts may not be enough to drive a substantial increase in consumption in the near term. The Energy Information Administration (EIA) forecasts that China’s petroleum and liquid fuels consumption will grow by about 0.1 Mbpd in 2024 and by 0.3 mbpd in 2025.
Meanwhile, OPEC has revised its outlook for global oil demand, citing the slowdown in China’s economy. OPEC now expects daily oil demand to grow by approximately 2 Mbpd in 2024, a reduction of 80,000 bpd from its previous forecast. This adjustment underscores the significant impact of China’s economic deceleration on the global oil market, with weaker demand from one of the world’s largest consumers contributing to a more cautious outlook for oil demand growth.
In the US, oil demand is expected to plateau at 20.3 Mbpd, a slight drop from the previous estimate of 20.5 Mbpd. However, the Energy Information Administration (EIA) has maintained its forecast for 2025 at 20.6 Mbpd, signaling no anticipated changes in long-term demand. A decline in oil prices driven by weakening demand in the U.S. and China could trigger further reductions in investment, particularly in higher-cost production areas like U.S. shale. This, in turn, could impact future supply dynamics.
To quantify the potential impact, a 2-3% decline in oil demand from both the US and China could reduce global demand by approximately 1.1 to 1.7 Mbpd. Such a drop in demand might lead to a sharp decline in oil prices, potentially in the range of $10-20 per barrel, depending on how quickly and effectively the supply side adjusts to the reduced demand.
While lower crude oil prices will be good for India, Morgan Stanley said that the impact could be negative depending upon the extent to which prices fall as that would only strengthen fears of a slow down in two largest economies. Do you concur with this view?
For India, lower crude oil prices generally benefit, particularly by reducing import bills and helping control inflation, there are broader global implications that could offset these advantages. If crude prices fall sharply, it often signals weakening demand, which can be a sign of economic slowdown in major economies like the US and China. Since these two countries play a crucial role in driving global economic growth, a slowdown there would negatively impact global trade and economic sentiment.
India being closely linked to global economic conditions, a significant slowdown in the U.S. and China could lead to lower demand for Indian exports, reduced foreign investments, and a general tightening of global financial conditions. So, while cheaper crude is beneficial in isolation, the broader economic environment and its impact on global growth must be considered. If the price decline is due to supply-side factors like geopolitical stabilization or increased production, it’s more favorable for India. However, if it’s driven by demand-side weakness from major economies, the net impact could indeed be negative.
What should traders/investors do with crude oil?
Sell on rise till levels of Rs 5,050. Resistance on the upside would be around Rs 6,000, and major recoveries could be used to sell crude oil.
Also Read: Crude oil prices fall 26% from peak. Which are the best stocks to buy?
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)