Tropical storm threat lifts crude oil but sentiment remains weak
Oil prices showed marginal recovery on Monday to settle a per cent up at $68.71, following its worst weekly fall since October 2023 as WTI fell 8 per cent and Brent was down 10 per cent. Oil prices stabilised yesterday amid the threats from the tropical storm on the US coastline which may disrupt the production line and could see a short term rally in prices.
Tropical storm threat
The Gulf coast of US is threatened by the tropical storm Francine strengthened as it moved north in the Gulf of Mexico, prompting oil drillers to evacuate crews and halt some offshore crude production, while the US Coast Guard warned shippers of approaching gale-force winds. The coast has 60 per cent of US refineries and accounts for 15 per cent of US crude oil production. Any disruption could see a spike in WTI prices.
OPEC+ faces uphill task
Overall, crude oil demand outlook has turned bearish which leaves OPEC+ with two options they can continue to try managing supply to support prices. However, in doing so, they will be giving market share away to non-OPEC+ producers. The other option is to open the taps to push out other producers. Obviously, the group would have to be willing to accept much lower prices with this option. While we believe OPEC will follow the former option, there is a risk, particularly if they are having little success in supporting the market, that they decide to pursue the other option at some point through 2025.
Although OPEC+ agreed to pause its scheduled crude production hike of 180,000 bpd in October and November due to recent weakness in crude prices and signs of fragile global energy demand. OPEC will release its monthly report today while last month the group revised its 2024 demand growth estimate down by 130k b/d to 2.11m b/d, while there was also a marginal revision lower in 2025 demand.
Saudi Arabia cut its official selling prices (OSP) for all grades to all regions, highlighting concerns over the demand picture. The Saudi’s flagship Arab Light into Asia was cut by $0.70/bbl to $1.30/bbl over the benchmark, the weakest level since November 2021, indicating weak demand.
Data in focus
China also releases its trade data for August, which will offer some more insight into how Chinese oil demand is performing. China’s Crude imports over the first seven months of the year were down 2.4 per cent Y-o-Y. OPEC will release its latest monthly oil market report followed by the EIA (US Energy Information Administration) Short Term Energy Outlook today, which will include its latest outlook on the global market and US crude oil production forecasts.
Outlook
OPEC+ cuts leave the market a bit tighter for the remainder of this year, this doesn’t resolve the surplus that is expected next year. The crude oil market will remain tight through the third quarter, it will begin to stabilise in the fourth quarter and potentially move into a surplus by 2025. Demand weakness and a soft oil balance in 2025 are still clearly a concern. In the short-term prices are expected to decline further to support of $65.
WTI Crude oil Oct: Support: $65; Resistance: $72
MCX Crude Sep: Support: 5500; Resistance: 5900.
(Disclaimer: Mohammed Imran is a research analyst at Sharekhan by BNP Paribas. Views expressed are his own.)
First Published: Sep 10 2024 | 12:08 PM IST
