Crude oil rallies amid renewed geo-political risks
WTI prices softened in Asian session on Tuesday, following a 3 per cent rally on Monday, and gaining over 6 per cent in the past five sessions amid renewed geo-political risks and optimism surrounding the US rate cut.
WTI crude rose 3.46 per cent to $77.42 on Monday and Brent crude increased 3.05 per cent to $81.43. The spike was driven by Israel’s pre-emptive strike on Hezbollah in Lebanon and a 48-hour state of emergency declaration. Additionally, Libya’s eastern-based government announced the closure of all oil fields, halting production and exports.
Renewed geo-political risk WTI crude oil prices bounced back sharply, after hitting eight month-low of $71.50 last week, to trade above $77 on Tuesday on the back of escalating geo-political tensions. Last week, Russia launched a coordinated missile and drone attack on cities and critical infrastructure across Ukraine. Later, Israel launched a pre-emptive strike involving 100 warplanes on Hezbollah in Lebanon and declared a 48-hour state of emergency.
Separately, Libya’s Eastern government said on Monday morning that it would stop all oil production and export. The country exports around 300kbpd of oil. All these developments will be supportive for oil prices
Weak Chinese demand for oil China remains the weak link for oil demand, leading to its underperformance in recent months, as the data showed that imports from the world’s largest oil importer fell 12 per cent in July following an 11 per cent annual decline in June, although that decline was from a record high booked for June 2023.
In the first half of 2024, crude arrivals also dropped by 2.3 per cent compared to the first half of last year. Refineries in China produced 6.1 per cent less fuel in July this year than a year earlier, logging the fourth consecutive monthly decline in output and signalling that the period of weak Chinese demand isn’t over yet.
China imported 9.97 million barrels of oil daily last month on average, which was 12 per cent lower than the June figure and 3 per cent lower than the daily import average for July 2023.
Opec+ dilemma Opec+ is currently sabotaging 6 per cent of global production through their production cut deal, which has resulted in declining market share in favour of non-Opec countries. Opec, however, is unlikely to reverse any of the production cuts that it approved last year as growing production from non-cartel countries is on the rise, pressuring prices.
Opec+ rolled out a plan to restore some crude production in Q4, which sparked worries about a glut in global oil supplies. On June 2, Opec+ extended the 2 million bpd of voluntary crude production cuts into Q3 but said they would gradually phase out the cuts over the following 12 months, beginning in October. Opec pledged to extend its crude production cap at about 39 million bpd to the end of 2025.
Bullish weekly oil inventory data At 426 million barrels, US commercial crude oil reserves are about 5 per cent below the five-year average for this time of year. Gasoline stocks are about 3 per cent below the five-year average for this time of year and gasoline demand has stood above 9 mbpd for the past four weeks, indicating a strong consumer demand, which have helped prices to recover last week.
WTI, Brent crude oil outlook Despite these fluctuations, the International Energy Agency expects demand growth to be just under 1 million barrels per day (mb/d) in both 2024 and 2025, considerably below last year’s 2.1mb/d growth, but not necessarily alarming.
Demand still looks soft to sustain the recent rally, while production from Opec+ and non-Opec has grown in recent months to keep the oil balance in surplus. We expect oil prices to face immediate resistance of $80 and the rally would find it difficult to sustain above it, without jump in implied demand. Hence, we expect some moderation in prices from the current level could see WTI falling back to $72 in coming sessions.
WTI Crude Oil Oct: Support: $72, Resistance: $78
MCX Crude Sep: Support: 6,100, Resistance: 6,600
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Disclaimer: Mohammed Imran – Research Analyst, Sharekhan by BNP Paribas. Views expressed are personal.
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