By Royce Vargheese Joseph
WTI crude oil futures see-sawed between $85 and $94 per bbl last week and closed lower by almost 4%. Oil prices started retreating earlier last week on demand concerns, as the world’s second largest consumer China grapples with rising covid cases and demand-sapping zero-covid policy. China’s covid tally crossed 10,000 cases and the manufacturing hub Guangzhou, where most of the city’s COVID-19 cases have been reported, extended its lockdown till Sunday. China’s commitment to its strict zero-Covid policy has been weighing on the economy and domestic oil demand since March 2022. Meanwhile, unexpected build-up in EIA inventory data further weighed on prices, which showed that US crude oil inventories rose by 3.925 million barrels in the week ended 4th November against market expectations of a small increase. US weekly crude oil output also edged higher to 12.1 mbpd, up by 2,00,000 barrels from the previous week.
However, oil prices staged a decent rally in the last two trading days of the previous week, up almost 3.5%, amid a weaker greenback and optimistic reports of China’s covid policy front. China has cut the quarantine period for inbound travellers, and also reduced the amount of time people entering the country must spend in quarantine and said they will scrap a system that penalizes airlines for bringing virus cases into the nation, according to the NHC. At the same time, dollar index plunged below 107 levels, down almost 4% in the previous week, as lower than expected US inflation data set the stage for a slowdown in Fed’s aggressive rate hikes, aiding commodities priced in dollars.
Customs data for October showed that China stepped up oil imports, as the government released more fuel export quota in an attempt to help revive the country’s virus-battered economy. The world’s largest crude importer bought 43.14 million tons in October or 10.2 mbpd, which is 4% higher than September, as Beijing issued quotas that allow Chinese refiners and traders to export another 15 million tons of fuel from late September to the first quarter of 2023.
Also read: CPI inflation likely to cool off to 6% in 4 months; RBI MPC may raise repo rate by 30-50 bps in Dec meeting
Price cap failure might lead to short-term spikes
Oil prices might trade with an upside bias for this week, as supply concerns might once again take center stage. Weakness in dollar index and relaxation in China’s covid restrictions might aid the bullish sentiments for now. The EU sanctions on Russian seaborne crude exports come into effect from 5th December. The West is actively considering a price cap mechanism ahead of sanctions so that Russian output doesn’t fall and prices don’t spike. However, Russia has made it very much clear that they won’t be supplying oil to any nation that is agreeing for a cap and that they could even temporarily cut oil output for a few days. In the event of a price cap fail, resulting in a fall in Russian output, we might see a sharp rally in oil prices. Prospects of price cap might add to some risk premium in the medium term. Final details of the price cap to be imposed by wealthy G7 democracies and Australia might be coming in the next few days or maybe weeks. In the November monthly report, OPEC reduced its forecasts for global oil demand again as the group implements production cutbacks aimed at keeping markets in balance, particularly due to a weaker economic backdrop and China’s strict anti- Covid measures, and lowered estimates for the amount of crude it will need to pump this quarter by 520,000 barrels a day, following a similar-sized downgrade a month ago.
Covid cases in China are rising sharply, which can also be closely watched, after the recent announcement of ease in restriction. We expect MCX Crude oil November futures to trade in the range of Rs.6,700-7,500 per bbl with an upside bias for the week.
(Royce Vargheese Joseph is a Research Analyst, Commodity at Anand Rathi. The views expressed are the author’s own. Please consult your financial advisor before investing.)