 "Crude oil strategy today, Oct 29: Short the rally; WTI resistance at $70")
Israel's limited attack on Iran wipes out war risk premium from crude oil
Crude oil prices tumbled 6 per cent on Monday, with Brent settling under $72 and WTI at $67.38, This was their biggest intraday decline in two years as Israel signalled it was open to a short truce in Gaza in exchange for the release of a small number of hostages.
This comes after Israel's retaliatory strike on Iran over the weekend that spared the OPEC producer's oil infrastructure. Israel's retaliatory strike hit key military and air defence targets in Iran, avoiding the oil, civilian, and nuclear targets that would have likely sparked a new strike by Iran on Israel. There is a possibility of a new tit-for-tat strikes between Iran and Israel, but the markets are hoping that the current round of direct Iran-Israel attacks is over.
On the bullish development ,Vortexa, which tracks the floating oil tanker, showed a decline in crude oil held worldwide on tankers. The tankers, that have been stationary for at least seven days, fell by 18 per cent week-on-week to 55.49 million barrel for the week ending October 25. But the fortunes of crude oil underperformance are tied to economic health of China -- the largest energy importer in the world.
That said, since opening from the Covid-19 restriction 16 months ago, Chinese economy is still nowhere near pre-Covid health. Its crude oil demand has weakened and is a bearish factor for oil prices. According to industry sources, China's total apparent oil demand in September fell 6.98 per cent year-on-year to 14.176 million bpd, and total Chinese oil demand this year (Jan-Sep) is down 3.8 per cent Y-o-Y to 13.99 million bpd.
IEA, Opec, and EIA have all revised down their oil demand outlook for 2025 citing China's falling imports. The IMF expects China's economic growth to slow from 5.2 per cent last year to 4.8 per cent this year and 4.5 per cent in 2025.
The overall world economy is expected to grow 3.2 per cent in both 2024 and 2025, down a tick from 3.3 per cent last year and worldwide inflation will cool from 6.7 per cent last year to 5.8 per cent this year and to 4.3 per cent in 2025.
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Opec+ has plenty of problems
Opec+ is facing an uphill task of choosing between the two evils - maintaining the market share by raising the production, which may cost them oil revenues due to decline in oil prices or else lose market share to non-Opec producers by holding the productions cuts.
Despite Opec+ holding back 6 per cent of global production through its product cut policy, but still the global market balance continues to observe surplus as the members repeatedly fails on compliance to overproduce their quota. The Opec+ countries that are subject to output caps have pumped together more than 600,000 barrels a day above their self-imposed limits. The overproduction, as OPEC+, last month, reached nearly 850,000 barrels a day, resulting in prices correction in last two months.
Outlook
In the short-term, prices may be news driven in either direction due to elevated geopolitical risk. However, fundamentals are expected to be bearish through 2025. We expect WTI to test support of $60 in Q1-2025. For now, the prices may broadly trade in the range of $66-$72 in the absence of major geopolitical rift. We advise traders to look for shorting the rallies.
WTI Crude oil Dec: Support: $66, Resistance: $70
MCX Crude Nov: Support: 5,600, Resistance: 5,900 ========================= Disclaimer: Mohammed Imran is a research analyst at Sharekhan by BNP Paribas,. Views expressed are his own.